Israel’s Economic Comeback

April 13, 2005

The venture-capital industry, which closely tracks high-tech, saw its own strong recovery. Investments in start-up companies rose by nearly 50% in 2004 to US $1.5 billion. The renewed interest in local start-ups has led Israeli venture firms to raise over US $1.2 billion in new-investment funds.

On the security front, progress was being made even before the November 11 death of Palestinian leader Yasser Arafat. The partially completed fence, which runs mostly near the pre-1967 border, though controversial, has prevented many suicide bombings, and the Israeli army has had more success in thwarting attacks.

With the recovery under way, the jobless rate is inching down, though it remains high at 10.1%. Prices are rising by about 1%, giving Israel one of the lowest inflation rates globally. Better growth and low inflation have lifted the shekel to its highest exchange rate against the dollar in three years.

The shekel’s strength has enabled the Bank of Israel to cut rates. Last December, the central bank trimmed its discount rate to a record low of 3.7%. Also, the government cut spending and reduced the deficit from 5% of GDP in 2003 to about 3.5% in 2004.

In 2005, export growth is expected to ease up as a result of slower growth in most major global economies. This should be partially offset by an expected rise in domestic demand, so real GDP growth is set to be about 4% again in 2005. But private and government economists think the rate could be higher if security conditions continue to improve. One key sign to watch for: whether Israelis and Palestinians return to the negotiating table after the January 9 Palestinian election.

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