Bank of Israel Annual Report 2006 Presentation to Knesset Finance Committee May 2007

2006 was an excellent year for Israel's economy: The economy grew rapidly for the third year in succession, with growth led by the business sector; Employment increased, labor force participation rose, and unemployment went down; real wages rose moderately. The current account surplus increased to an unprecedented level, and capital inflows and outflows continued to increase; The financial markets remained stable, with a rise in share prices, and with the continued trend of portfolio adjustment following the reforms of the last few years. The economy made notable achievements in 2006, both on the real side and the financial side, remarkably so in light of the Second Lebanon War that took place in the summer.

2006 was an excellent year for Israel's economy: (continued) Macroeconomic policy supported growth:  Fiscal policy was reflected by the relatively small public sector deficit (1.8 percent of GDP), and by a reduction of the public debt to 87.8 percent of GDP.  Public expenditure increased by 4.5 percent, and, excluding interest, by 5.5 percent (civilian expenditure by 4.8 percent, and domestic defense expenditure by 7.5 percent).  In the first half of the year inflation was higher than the upper limit of the inflation target range, and in the last few months of the year was below its lower limit, under the effect of the course followed by the exchange rate and fuel prices.  Monetary policy acted to return inflation gradually to within the target range.

GDP Growth ( ) SOURCE: Based on Central Bureau of Statistics data Bank of Israel forecast

Growth Rate of GDP & Business Sector Product (Quarterly, annual rates of change, ) % SOURCE: Based on Central Bureau of Statistics data.

Labor Productivity and Total Factor Productivity of the Business Sector ( ) % *GDP per hour worked (real percentage change on previous year). **A factor input unit is weighted as 68 percent labor and 32 percent capital (real percentage change on previous year). Labor input includes foreign workers. Source: Based on Central Bureau of Statistics data.

Per Capita GDP in Israel relative to the OECD, and to the U.S., (by PPP 2005) Source: OECD Statistics and Central Bureau of Statistics data.

GDP per Employee, International Comparison, 2005 (by PPP 2005, Israel=100) % Source: OECD Statistics.

Labor Force Participation Rate, International Comparison, 2005 % Source: OECD Statistics.

How Growth was Reflected in the Labor Market: The economy's rapid growth increased the number of employees, reduced unemployment, and raised real wages. The rise in wages was again accompanied by a rise in labor productivity in 2006, and a reduction in unit labor costs. Unemployment among the highly educated declined and approached its natural level; this was reflected in a rise in wages among human-capital intensive industries. For those with low educational levels unemployment declined, and the downward trend in the rate of participation in the labor force halted, but there was only a moderate rise in real wages in the unskilled-labor industries.

Real Wage per Employee Post (2004 prices) (seasonally adjusted, 12-month moving average) Shekel

Nominal Unit Labor Costs in the Business Sector in Israel, (Quarterly data, seasonally adjusted) Product per labor hour Labor cost per hour Unit labor cost SOURCE: Central Bureau of Statistics.

Employment, Unemployment and Participation Rates (quarterly data, ) % SOURCE: Central Bureau of Statistics, Manpower Surveys.

Unemployment Rate by Education Level (annual data, ) % SOURCE: Central Bureau of Statistics, Manpower Surveys

Incidence of Poverty Among Individuals, by Various Measures ( ) *Excluding East Jerusalem Arabs. *The 2005/06 data are according to the decline in relative poverty including among Arabs of East Jerusalem. SOURCE: Central Bureau of Statistics Income and Expenditure Surveys.

Incidence of Relative Poverty among Individuals, 1997 and 2005 a a Excluding Arabs of East Jerusalem. SOURCE: Central Bureau of Statistics Income and Expenditure Surveys 1997 and By family sizeBy education of head of household By number of wage earnersBy population group

Rate of Employment and Average Wage per Employee Post, by Population Group, )Up to 65 years old. 2)The ultra-orthodox are identified by enrollment in an ultra religious high school. SOURCE: Central Bureau of Statistics Income and Expenditure Surveys.

Incidence of Poverty among Ethiopian Immigrants (by Family, ) % SOURCE: National Insurance and Household Expenditure Survey 2005.

Socioeconomic Characteristics of Veteran Jewish Israelis, a and New Immigrants, 2005 a)And “others” (mostly non-Jewish immigrants). b)Those who immigrated in 1990 or after. c)Those who immigrated from Ethiopia or who have at least one parent who did so. d)Among those aged e)Those aged 20 or above who are satisfied or very satisfied. SOURCE: Based on Central Bureau of Statistics data.

Cost of the Encouragement of Capital Investment Law as Percentage of GDP, by Grant or Alternative Track, SOURCE: Based on data from the Central Bureau of Statistics, State Revenue Administration and the Budget Books of the Ministry of Finance.

Use of Various Means of Transport by Country, in Terms of Kilometer per Passenger, ) Use of public (road and rail) and private transport is calculated as the number of passengers multiplied by the average number of kilometers per passenger. 2) Israel: 1996 data are according to Travel Habits Survey 1996/7, and 2005 data are estimates based on 1996 data and rates of change of real turnover (in buses) and of travel (private transport) in SOURCE: For Israel, Travel Habits Survey 1996/7 and the Central Bureau of Statistics; for the other countries, Eurostat – Transport Statistics in Focus 9/2006.

Exchange Rate, Export Competitiveness and Balance of Payments

Shekel / Dollar Exchange Rate 2/1/ /5/2007

Shekel / Euro Exchange Rate 08/05/2007 – 02/01/2004

Index of Real Exchange Rate by Trading Partners (01/ /2007) A rise in the index signifies a real depreciation. SOURCE: Based on IFS data. % 117.4

Israel’s Manufacturing Exports to US and EU Compared to US and EU Imports /2007 Total USTotal EU High-tech industries: US High-tech industries: EU SOURCE:Based on data from Central Bureau of Statistics, United States International Trade Commission and COMEXT-EUROSTAT.

Level of Openness of Israeli Economy: Exports and Imports ($ million, ) Goods and services excluding diamonds. SOURCE: National Accounts, Central Bureau of Statistics.

Current Account of the Balance of Payments (as share of GDP in annual terms) % SOURCE: Central Bureau of Statistics.

Nonresident Investments in Israel $ million Israeli Investments Abroad $ million SOURCE: Central Bureau of Statistics, Balance of Payments.

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