Israel Economic Statistics: The Israeli Economy in 1997

Main Developments

In the second half of 1997 (the period reviewed), as in the first half of the year, economic growth was slower than it has been in recent years, and in the real sector the trends evident since 1996:lll persisted, with a decline in inflation, improved foreign-trade situation, and gradual rise in unemployment. The annual inflation rate reached the lower level of the target set by the government, 7 percent, the average trade deficit fell by $200 million, and in 1997:lll the unemployment rate rose to 8.1 percent. The low level of economic activity was the result of the decline in domestic demand, which encompassed all the components of domestic uses and reflected cyclical factors as well as fiscal and monetary restraint. To these were added other factors, such as the conclusion of most of the expansionary effect (particularly in investment and consumption) of the mass immigration and the continued contraction of traditional industries, as part of the structural change which the economy is undergoing.

Compared with the first half of 1997, in the period reviewed prices in all the main items of the Consumer Price Index (CPI) rose more moderately, inflation expectations were lower (continuing to decline throughout the period), and the inflation environment, which is derived from these two factors, stabilized in the lower half of the inflation target range set by the government for 1997 (7-10 percent).

Several indicators point to the moderation of demand. These include domestic uses (which fell in 1997:lll by about one percent, annual rate), the slower growth of retail trade, the decline in imports of consumer goods as well as various construction industry indicators, the drop in immigration, and the slowdown in bank credit. On the supply side, the slow increase in GDP, in industrial production, and in the import of intermediates are indicative. The general moderation of economic activity can also be seen from the relatively modest rise in the state-of-the-economy index, which incorporates several of these indicators.

During the period reviewed, the trade deficit shrank to an average monthly level of $473 million, following a slow rise in merchandise imports and a more rapid one in exports. However, the trend of improvement in the trade deficit reversed in 1997:lV as the growth rate of exports slowed and that of imports rose. The development of the deficit is a result of both endogenous and exogenous factors, which worked in opposite directions: the slowing of domestic demand, the improvement in the terms of trade, and the expansion of world trade acted to reduce the deficit, while continued real appreciation acted to increase it.

In the labor market, demand pressures continued to ease, and while the supply of Israeli labor rose, demand for it grew more slowly. The unemployment rate, which began to rise in the first half of 1996, continued to grow, and real wages rose, inter alia because of dismissals at low wage levels and a 12 percent hike in the minimum wage in April 1997. Employment grew by only one percent, compared with a more rapid increase in the number of hours worked. In addition to reflecting the moderation of economic activity, the rise in unemployment is also a sign of the structural change which the economy is undergoing. On the one hand, high-tech industries, which are not labor-intensive and in which there may even be indications of labor shortages in certain professions, are expanding, while on the other, the traditional industries and tourism, which are labor-intensive, are shrinking.

During the period reviewed, public-sector budgetary discipline, intended to restrain demand and improve the balance of payments, was maintained. The annual budget deficit target of 2.8 percent of GDP was attained, and the share of government expenditure in GDP was lower than in the equivalent period in 1996. The public-sector budget deficit was financed entirely by income from privatization, which was greater than expected. Consequently, there were no issues of long-term government bonds, and this helped to lower the bond yield curve. The 1998 budget was passed by the Knesset, and the deficit of 2.4 percent of GDP complies with the Budget Deficit Reduction Law.

In monetary policy, towards the end of the first half of 1997 the exchange-rate band was widened significantly, and the interest rate on the sources made available to the commercial banks by the Bank of Israel was reduced by 1.2 percentage points. These measures caused the yield gap between Israel and financial markets abroad to shrink, and the potential risk of a change in the interest rate to grow, so that the excess supply of foreign exchange evident in the first half of the year vanished. Thus, during the period reviewed, with the exception of the last few days of the year, the Bank of Israel did not have to engage in foreign-currency conversions for the private sector - which had previously reached a high level - and was able to discontinue the sterilization activity arising from them. During the period reviewed there were no significant changes in the monetary aggregates, despite the crisis in the Far East. The expansion of the narrow money supply (M1) exceeded that of nominal GDP, and unindexed local-currency credit balances rose quite rapidly at the expense of credit denominated in and indexed to foreign currency, which slowed considerably, so that expected average real interest remained more or less the same as it had been in the first half of the year.

In the capital market, the high level of activity evident in the first half of the year persisted. Turnover and offerings rose, although the upward trend in yield indices that had characterized the stock market till then slowed, inter alia because of the crisis in South-East Asia, and their real level at the end of the period reviewed was lower than at the beginning. Bond indices followed a similar pattern to share indices, although at the end of the period reviewed their real level remained slightly higher than at the beginning.

Table 1. Indicators of Business Activity, 1996-97
(all data, excluding construction are seasonally adjusted)

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The Principal Industries

The period reviewed was characterized by a low level of economic activity, as has been the case since 1996:ll. Preliminary national accounts data indicate that in 1997:lll business-sector product (seasonally adjusted) rose by an annual 5.7 percent, and GDP by 2.2 percent, while domestic uses (including inventory growth) fell by 1.2 percent, after increasing by 7.2 percent in 1997:ll. The decline in domestic uses (reflecting domestic demand) is a result of the marked slowdown in private consumption (a rise of only 0.5 percent), a sharp drop in gross investment (some 11 percent), and a slow increase in public-sector consumption (about one percent). Indicators from industry, construction, and tourism reveal that the trend continued in 1997:lV, too.

Firms' replies to the Bank of Israel's quarterly survey of companies show that in both 1997:lll and 1997:lV the level of economic activity was low, and that the slowdown persisted in certain industries. Industrial firms reported that activity remained slack, that the low level of orders constitutes the main barrier to expansion, and that exports rose in both quarters. In transport, communications, and commerce, too, the level of activity remained low, and reports from the construction and hotel industries also indicate that the decline there has persisted.

In July-November 1997 industrial production remained stable, and its index was just under 2 percent higher (annual rate) than in the equivalent period in 1996. Alongside this slow rise, labor input fell (both the number of employed persons and of hours worked declined). The by-industry breakdown (seasonally adjusted) shows that in July-October 1997 output fell in most two-digit industries, especially quarrying and non-metallic minerals, whose output serves as an intermediate in construction (a 15 percent decline), and that output of transport vehicles and electronic equipment rose (by 10 and 9 percent respectively). The long-term change in the composition of industry persisted in the period reviewed, and the output of the textile and clothing industry fell by some 5 percent in 1997:lll.

Most indicators of construction activity show that there was a slowdown during the period reviewed. In 1997:lll building starts dropped, completions increased relatively slowly (inter alia because of the continued decline in starts), apartment sales and mortgages taken up fell, and the building time of government-initiated housing rose from 20 months in the equivalent period in 1996 to 24 months. Another indicator of the intensification of the slowdown in the housing market is sales of new apartments in 1997:lll. The number of unsold apartments continued to rise (up by 14 percent over 1997:ll), and of these the number unsold by the basic-structure stage rose slightly (about 2 percent), the number of almost completed apartments unsold increased by 30 percent, while the number of completed apartments unsold rose by 156 percent. Tourism activity contracted, too, and in the period reviewed tourist arrivals were down by some 4 percent from the equivalent period in 1996.

Table 2. National Accounts, 1996-97
(seasonally adjusted)

*
^a
Last month for which data available.
Compared with same period in preceding year.
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The Labor Market

In 1997:lll the labor market continued to ease, as it has since mid-1996, and the unemployment rate rose to 8.1 percent. The incremental labor supply in 1997:lll (seasonally adjusted, some 15,000 persons) was not fully taken up by demand in the principal industries, and the number of new employees was lower than that of persons newly registered as unemployed (5,000 and 10,000 respectively). Despite the increase in unemployment, wages per employee post rose, especially in the business sector, and this is partly explained by dismissals of low-wage employees. There are further indicators that labor-force pressures have eased: the employment rate of the working-age population fell to its lowest level for two years, the number of claims for unemployment benefit rose, and the number of work-seekers has risen each month since the beginning of the year. The two last indicators show that the labor market remained slack in 1997:lV, too, and in December both reached long-term peaks (152,700 work-seekers and 104,500 claims for unemployment benefit).

In 1997:lll the number of Israelis employed was only one percent higher than in 1996:lll, with the entire increase in the public sector. At the same time, the number of hours worked in all the principal industries rose by 5.6 percent in 1997:lll. The tendency to utilize existing employment rather than taking on additional employees is an indication of employers' uncertainty regarding the chances of economic recovery. In agriculture and industry the number of employees fell in comparison with 1996:lll, while in banking, insurance, and finance it rose, as it did in commerce and car repairs, too. The greatest increase in labor input was in health and welfare services, where employment rose by 9 percent and hours worked by 5 percent.

In 1997:lll immigrants constituted 15 percent of the labor force, compared with 13 percent in 1996:lll, and their share rose in both employment (from 13 to 14.8 percent) and unemployment (from 16.5 to 17.5 percent). The percentage of immigrant labor-force participants rises with their length of stay in Israel. Thus, 50.2 percent of immigrants who arrived in and after 1994 were labor-force participants, compared with 54.8 percent of those who arrived in 1992-93, and 58 percent of those who arrived in 1990-91. The number of new immigrants is gradually declining, and in 1997 it was only 60,000, inter alia because the source of potential immigrants has dried up and unemployment among immigrants has risen.

The number of foreign workers (both legal and illegal) who are employed in Israel rose by less in 1997 than in the previous three years. Government estimates put their number at between 185,000 (Ministry of Labour and Social Affairs) and 127, 000 (Central Bureau of Statistics), and half of them are employed in construction. Many of the foreign workers are unskilled, and the low cost of employing them serves as an incentive to employ them in industries that are unskilled-labor-intensive. In 1995 and 1996 the number of foreign workers rose far beyond the number required to replace workers from the Autonomy and the administered areas, and exerted downward pressure on the wages of unskilled Israelis. According to the CBS estimate, the number of foreign workers rose by 2,000 in 1997, while the number employed in construction fell by 1,000, alongside the general economic slowdown.

In 1997:lll the number of unemployed persons reached 194,000, similar to the 1993 average, but the characteristics of unemployment point to a significant change, with a fall in the share of married persons, adults, and those who have been unemployed for a relatively long time.

In 1997:lll the level of wages per employee post (in constant NIS, excluding workers from the Autonomy and the administered areas) was just under 2 percent higher than in 1996:lll. In the public sector wages fell slightly, and in the business sector they rose in all the two-digit industries, especially construction and industry (by 5.4 and 5.1 percent respectively). In the context of the rise in unemployment, the wage-hike in the business sector is explained by several factors: a shift in the composition of employment as a result of the structural economic change, a shortage of skilled professionals, and a 12 percent rise in the minimum wage in April 1997. Part of the increase in real wages may reflect employment contracts based on a steeper rise in prices. During the period reviewed the collec-tive agreements for 1993-97 came to an end for most occupational grades in the public sector, a cost-of-living increment of 2.4 percent was paid in August, and wage review discussions were held. Several strikes were held by different public-sector sections in the period reviewed, and in December there was a general strike following an attempt to alter the pension arrangements of long-standing employees.

Table 3. Indicators of Labor Market Developments, 1996-97
(seasonally adjusted)

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The Balance of Payments

During the period reviewed, the monthly average trade deficit (excluding ships, aircraft, fuel, and diamonds, seasonally adjusted) amounted to $473 million, less than the annual average, and about $200 million lower than the monthly average in 1996. Alongside the reduction of the trade deficit, merchandise imports rose and merchandise exports increased more rapidly, as a result of opposing forces: domestic demand fell, the terms of trade improved, and world trade expanded, all of which served to reduce the trade deficit, while real local-currency appreciation against the basket of currencies acted to enlarge it.

For the first time in many years, the annual rise in merchandise imports was checked, and this encompassed all its major categories. After declining to their lowest level in years in the first half of 1997, merchandise imports rose slightly in the period reviewed, with a slight change in their composition: imports of capital goods (which serve as an indicator of future activity) rose, imported intermediates (which serve as an indicator of current activity) rose slightly, and consumer goods imports fell slightly, as imports of consumer durables declined and direct imports for current consumption rose slightly. Merchandise exports rose more quickly in 1997 than in 1996 (9.2 and 7.1 percent respectively), due to their relatively rapid expansion in 1997:lll. The exports of foodstuffs and beverages fell, however (by 13 percent for the year as a whole), exports of textiles and clothing were stable, and there were increases in exports of communications, control and supervision equipment, medical and scientific equipment (22.6 percent), chemicals, electronic components, office machines, computers, engines, and electrical equipment (an increase of 12 percent on average). The marked rise in the share of the high-tech industries in exports indicates the extent of the structural change which Israel's economy is undergoing.

In 1997:lll the current-account deficit remained at its average level in the first half of the year, alongside an increase in the long-term capital inflow of the private sector and a sharp drop in its short-term capital inflow (see below). Capital transfers to Israel by nonresidents were $2 billion in the period reviewed (up to November), and most of them were invested in the domestic capital market. Residents transferred some $2 billion abroad, however, most of it due to the repayment of credit and an increase in deposits abroad. The net foreign debt as a percentage of GDP rose slightly in the period reviewed, and the Bank of Israel's foreign reserves rose by $2.3 billion to an unprecedented $20 billion.

Another stage in the program to liberalize foreign-exchange control went into effect at the beginning of 1998, and most of the restrictions on residents' purchases of foreign currency for placing in a resident deposit, on transfers of foreign currency between residents' foreign-currency accounts, and on derivatives transactions were removed. The restrictions on the maximum financial investment that may be made abroad by companies and mutual funds were also removed.

Table 4. Balance of Payments, Foreign Trade^a,and the Reserves, 1996-97
($ mill., current prices)

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World Developments and Their Implications for Israel's Economy

According to IMF estimates, the rate of increase of world product remained stable at about 4 percent, the volume of world trade grew by some 8 percent, and world inflation continued to decline. The growth rate of advanced economies increased slightly, while that of developing countries slowed, and inflation continued to decline in both groups, reaching its lowest level in a long period. The IMF forecast for 1998 is less rosy in two main areas than developments in 1997 might suggest (due partly to the crisis in East Asia which began towards the end of 1997, see below): the rate of growth in both advanced and developing countries will slow, as will world trade, while inflation will continue its decline in the latter, and is expected to reach about 8 percent.

In the middle of 1997, world capital markets were volatile and in a state of great uncertainty. The crisis began in Thailand, and spread to other East Asian countries, including Japan and Korea, within a few months. At the same time, stock markets in the OECD countries also became far more volatile. In 1997 long-term nominal interest rates continued to fall in the large advanced countries, whereas short-term rates rose only slightly in most of them, except for Britain, where they rose relatively quickly.

Real-sector world economic developments had several positive effects on Israel in the period reviewed: the reduction in world prices helped to lower prices in Israel; the expansion of trade apparently increased demand for Israel's goods, and as an outcome of changes in world prices, and especially the strengthening of the dollar against other currencies, Israel's terms of trade improved by more than 5 percent, which contributed to the decrease in the import surplus. Moreover, the continued slowing of price rises predicted by the IMF should also help in achieving the 1998 inflation target.

During the period reviewed, a financial crisis developed in East Asian countries. From the beginning of July 1997 to the beginning of 1998 the currencies of most South-East Asian countries were significantly devalued (Indonesia, 250 percent; Thailand, and South Korea, over 100 percent; Taiwan and Singapore, about 30 percent). The sharp decline in the value of the currency in the first three mentioned makes it hard for them to repay their debts - which have swelled in recent years - and this creates difficulties for their banking systems. International experts assess that this will depress domestic demand. As a result the total GDP of the countries of South-East Asia will fall by between 5 and 10 percent in 1998 (see D. Hale, The Global Economic Observer, December, 1997).

Although East Asian countries (including China and Japan) constitute about a quarter of the world economy, since the early 1990s they have accounted for half the growth of world output. There is a general consensus that the crisis in Asia will reduce the rate of growth in the US and the EU in 1998 by between 0.5 and 1 percent. As the East Asian crisis also has a negative effect on the flow of capital to developing countries (e.g., Brazil), these will have to adopt contractionary policies, and their rate of growth will also slow. There is however a silver lining to the crisis in East Asia as the devaluations there reduce expected world inflation. As the crisis worsened, the IMF proposed aid packages to the countries affected, linked to programs intended to stop the decline in those economies and lead to their recovery.

Israel's goods exports to South-East Asia, which reached about $3.6 billion in 1996 (some 18 percent of total goods exports), are expected to suffer as a result of the general fall in those countries' demand for imports. In the last few years Israel's exports to the countries which have been hit by the crisis surged, by 25-30 percent a year, so that the damage is bound to be felt keenly. Israel's exports may suffer even more both because of the domino effect on other countries, and because the significant reduction of prices of goods from countries whose currencies have been greatly devalued will make Israel's exports less competitive. Initial estimates suggest that the effect on Israel's exports will reduce GDP growth in 1998 by 0.5-0.8 percent.

Table 5. Indicators of Economic Development in Advanced and Developing Countries^a, and forecast for 1997-98

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Prices

In 1997 the government's inflation target was met - inflation was 7 percent, the lower limit of the target range. In the period reviewed, prices in all the main CPI categories rose more moderately than in the first half of 1997, and this effect strengthened during the period, with prices rising more slowly in 1997:IV than in 1997:III. Inflation expectations as estimated from the capital market were also lower in the second half of 1997 than in the first, and the inflation environment derived from these two factors settled in the lower part of the target inflation range (7-10 percent) in the period reviewed. The CPI rose by only 1.9 percent in the second half of the year, equivalent to an annual rate of 3.9 percent, and inflation expectations derived from the capital market averaged 9 percent, with slight deviations around that figure. In three months in the period reviewed the CPI rose, and in the other three it actually fell, after a long period of increases only.

Among the categories of the CPI, the fall in the price of fruit and vegetables was notable, following its steep rise in the first half of the year. Housing prices rose relatively slowly compared with their rise in January to June. After adjusting for the effect of these two categories, the CPI rose by 5 percent in annual terms, i.e., their effect on the CPI was to moderate its increase by about one percentage point. This is the reverse of their effect in the first half of the year, when they added 1.5 percentage points to the rise in the CPI. The rise in prices of both traded and nontraded goods slowed in the period reviewed, but as this was far more pronounced in the latter, it resulted in a small real depreciation, too small, however, to offset the significant real appreciation which occurred in the first half of the year.

The rate of inflation in a small open economy such as Israel's is affected by excess demand on the domestic market and by developments in the prices of exports, imported goods and their domestically produced substitutes (traded goods) - prices which reflect those abroad as well as the nominal exchange rate. In the context of contractionary fiscal and monetary policies in the period reviewed, these factors acted to reduce merchandise prices, so that the CPI rose by less than in the first half of the year.

Wholesale prices rose at an annual rate of 5.1 percent in the period reviewed, similar to the rise in the comparable period in 1996 (5 percent), and also to that in the dollar exchange rate (4.8 percent), and above both the 4.3 percent rise in the price of traded goods and the 2.3 percent rise in the exchange rate against the currency basket.

Table 6. Selected Price Indicies, 1996-97
(annual rates of change during period, percent)

*Last month for which data are available.

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The Government

In the second half of the year, as in the first, the public sector continued to observe budgetary discipline, intended to restrain demand and improve the balance of payments. The target deficit - 2.8 percent of GDP - was achieved, and initial cash-basis data indicate that the actual deficit was lower. Both expenditure and revenues were lower than planned, due inter alia to the lower than anticipated rise in prices, the arrival of fewer immigrants than had been expected (which reduces expenditure), and the greater economic slowdown than had been forecast (which reduced tax revenues from real-estate transactions and imports, and increased payments of unemployment benefit).

The government's domestic budget deficit excluding credit extended (cash basis) totaled NIS 7.3 billion in the period reviewed, 4.1 percent of GDP. This signifi-cantly exceeded the deficit in the first half of the year, and was the result of a sharp increase in expenditure in December not matched by a rise in tax revenues, a constant feature in the last few years. Expenditure in the period reviewed was lower as a percentage of GDP than in the first half of the year, while tax revenues were higher. The deficit of the public sector (which includes the Jewish Agency and the Bank of Israel) was financed entirely out of the government's proceeds from privatization, which significantly exceeded the planned amount. Until the beginning of December net borrowing from the public matched the total public-sector deficit; in other words, in July-November public-sector activity did not affect the public's financial sources. There was considerable injection in December, related to the budget; part of this was absorbed by the Bank of Israel, but most of it increased the monetary base (see below).

Monthly tax revenues throughout 1997 exceeded those in the comparable periods in 1996. This resulted from a rise in direct taxes, which were about 10 per-cent higher in the period reviewed than in the same period in 1996 owing to the increase in the number of employees, the rise in the real wage, and the failure to update the income-tax brackets. On the other hand, receipts of indirect taxes in the period reviewed were slightly lower than in the comparable period in 1996, despite the increased share of consumption in GDP and the rise in the rate of municipal property-taxes and in taxes on fuel and cigarettes at the beginning of the year. Income from import tariffs fell by a real 5 percent, in part due to the lower volume of imports than in the second half of 1996.

In real terms, transfer payments to households were about 7 percent higher than in the comparable period in 1996, most notable among them the income-support payments and unemployment benefits. The increase in both those items was the outcome of the economic slowdown, and these payments accounted for about a third of all transfer payments in 1997, up from a quarter in 1995.

Israel's budget for 1998, approved at the beginning of the year, totals NIS 207.7 billion. As expenditure will be financed without increasing taxes, the annual deficit (if the assumptions are realized) will be 2.4 percent of GDP, in line with the downward path specified in the Budget Deficit Reduction Law, 5752-1992. The budget incorporates additional commitments: undertakings to coalition partners - NIS 670 million to be met during 1998 within the constraints of the approved budget - and an obligation to provide a 'safety net' of NIS450 million for the health system. The 1998 budget is tight, and serious pressures may be expected on both revenue and expenditure (mainly as the expenditure side lacks an appropriate reserve).

Pensions in general, and noncontributory ('budgetary') pensions in particular, have recently returned to the center of public debate. Monitoring of noncontributory pensions is less efficient than that of contributory pension funds for three reasons: first, the retirement pension is determined according to the last salary; secondly, noncontributory pension is widely used in the early-retirement procedure; and thirdly, those responsible for making decisions about the terms and timing of retirement do not have to find a budgetary source for financing the payments. A large actuarial deficit (according to the Accountant

General) and the inadequate monitoring of noncontributory pensions may increase the tax burden and undermine the government's ability to meet its future commitments. The government therefore decided to transfer the public sector gradually to a system of contributory pensions. The government and the General Federation of Labor (Histadrut) entered into negotiations over the method of accumulation, during the course of which the latter called a general strike.

Table 7. The Budget and its Financing, 1996-97
(Cash flows, as percent of GDP)

* Last month for which data available.
^a Budjet deficit plus Jewish Agency injection plus non-budgetary injection.

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The Money and Capital Markets

In the period reviewed the inflation environment declined to the lower part of the target range (see section on prices), and in this context there were no exceptional fluctuations in the major variables characterizing the money and foreign-currency markets. The nominal interest on the sources which the Bank of Israel makes available to the banks was raised in September by 0.7 percentage points. The foreign-currency market was calm - there were no foreign-exchange dealings between the Bank of Israel and the public (except on the last two days of 1997 and the first four of 1998). Slight changes in inflation expectations led to minor changes in the expected real interest rate on the Bank of Israel's sources, and its average level remained a little lower than in the first half of 1997. (The average real interest on the monetary loan fell from 4.7 to 4.4 percent, and real interest on the banks' auctions for deposits with the

Bank of Israel declined from 5.4 to 4.9 percent.) There was intensive activity in the money and foreign-currency markets in the first half of 1997. In June 1997 this began to stabilize, as the parameters of the exchange-rate band were changed, and the nominal cost of the Bank of Israel's sources was reduced by 1.2 percentage points. These two factors, together with the rise in interest rates abroad and greater volatility in world exchange rates in light of the developments in Asia, narrowed the yield gap between Israel and abroad and increased the potential risk of deval-uation, and thus brought to an end foreign-currency conversions by the public. Capital imports by non-residents became capital exports, and for a short period the exchange rate, which till then had adhered to the lower limit of the band, rose. The trend change in the money and foreign-currency markets can be seen from the development of credit from authorized dealers (which is sensitive to interest-rate differen-tials), which expanded rapidly in the two years until the change, remained stable during the period, and did not rise even during the brief period when the central bank converted foreign currency.

Despite the differences in money- and foreign-currency-market activity in the first and second halves of the year, the rates of increase of the monetary base and the money supply did not change. The former rose by 16 percent, in annual terms, in July-December, compared with 18 percent in the first half. As the large-scale conversions by the private sector ceased, the Bank of Israel reduced the extensive absorption which had characterized the first half. This was reflected by the slower increase of the banks' auctions for deposits with the Bank of Israel, and the narrower differentials between the interest rates on these deposits (which amounted to some NIS32.5 billion at the end of the period) on the one hand, and the marginal cost of the monetary loan, on the other.

The narrow money supply (M1) increased at an annual rate of 14 percent in the period reviewed (compared with 15 percent in January-June), considerably faster than the growth rate of nominal GDP. Most of the rise occurred in July, since when the level has remained stable. There were no significant changes in the composition of the different investment channels for financial assets between the first half of the year and the second. The broad monetary aggregates (M2 and M3) both grew at an annual rate of 25 percent. Bank credit to the public increased by 13 percent in the second half of the year compared with 18 percent in the first half, which is consistent with the slowdown of domestic demand. As the rate of increase of credit slowed, the composition of credit changed, too. Credit denominated in or indexed to foreign currency, which had risen by 50 percent in the first half of the year, when it was relatively worthwhile, increased by only 6 percent in the second half, while local-currency credit expanded by 16 percent, compared with 8 percent in the first half.

Share-price indices rose slowly in 1997:III relative to January-June. They fell in 1997:IV, nominally off-setting the rise in 1997:III, and at the end of the period the real yield on shares was some 4 percent lower than at the beginning. This development affected all the main groups involved in stock-market trading except banking, which rose slowly in 1997:IV, and shares of the electricity and electronics industry. Both share turnover and capital raised were slightly higher in the second half of the year than in the first, but compared with the numerous flotations in the past there were relatively few initial public offerings. Bond indices followed the same path as shares, but the changes were less marked, and the yields on bonds remained stable in 1997:IV, and did not decline as did other securities.

Table 8. Monetary Indicators and Nondirected Bank Credit, 1996-97
(annual terms, percent)

Table 9. Interest Rates, Yields, and the Share-Price Index, 1996-97

*Last month for which data available.

Sources: Israel Central Bureau of Statistics