Growth forecasts for 2009 keep getting reduced

They began at close to 3%, were then revised down to 1.5% and are now reduced further to 0%. We're talking about growth of GDP forecasts for the Israeli economy in 2009. These are international forecasts – the "close to 3%" and "revised down to 1.5%" forecasts belong to the International Monetary Fund (IMF) while the 0% forecast was recently published by Merrill Lynch.

But local forecasts are not that different: the Bank of Israel, which also revised its 2009 growth forecast down to 1.5%, recently announced that it soon intends to reduce it further. Local forecasts are essential for the 2009 State Budget, which will only be approved once a new government is formed after the February 10 general election (because of the Gaza offensive, there is no absolute certainty that the election will take place on 10 February, so approval of the 2009 budget may be delayed even more).

Every State Budget has a growth forecast built into it, which is the basis for calculating expected tax revenues, which in turn are taken into account in determining the targeted budget deficit - and everyone knows the importance of the budget deficit in establishing an economy's credentials, both internally and internationally.

The 2008 budget deficit, published on 13 January 2009 by the Ministry of Finance, is already a cause of initial concern in this area. After declining steadily from 2004 to 2007 while the economy grew rapidly, the deficit increased from 0% of GDP in 2007 to 2.1% of GDP in 2008, 3.8 billion shekels (1/2% of GDP) above target. The main factor here: the below-target tax revenues during 2008 (total real tax revenues declined by 7.7% compared to 2007), a direct result of the developing economic slowdown. If the much slower forecast 2009 growth materializes, tax revenues will continue to decline in 2009 (as indeed most analysts expect them to do), causing a much bigger budget deficit headache.

There are two questions about the revised 2009 growth forecasts. Firstly, they appear to close the growth rate gap between Israel and other developed economies, for which the 2009 growth picture is also very dismal (with several forecast to experience negative growth), while the gap in 2008 was quite significant. It is true that estimates of Israeli GDP growth in 2008 were recently revised down from 4.5% to 4.1% (compared to more than 5% annually in 2004-2007), and are quite likely to be revised down further – to below 4% - as data for the final months of 2008 become available, but this still leaves 2008 growth in Israel significantly faster than in the other developed economies (which grew at 1% or less in 2008). The question is: why will the growth rate gap narrow in 2009?

The second question is, referring to both the global and Israeli economies: when will the recovery from the current slump begin? Few analysts argue that it will begin during 2009, most claim that at the earliest, the recovery will start in 2010 and will be very slow. An additional relevant question regarding the Israeli economy is: can a recovery in Israel begin independently of the recovery in the global economy. In a recent statement, Professor Stanley Fischer, Governor of the Bank of Israel, maintained that an Israeli recovery is highly dependent on the global recovery.

Just as recently, a poll of a group of senior economists in the US reported that based on growth patterns in previous severe economic crises, the current recession is likely to be deep and continue for anywhere from 2 to 5 years.

If we take together the expected length and depth of the current global economic crisis and Israel's dependence on the global economy, it is not difficult to appreciate why 2009 growth forecasts for Israel are being revised down all the time and why the gap in growth rates is likely to narrow significantly in 2009.

Even though there are some optimists who argue that we will see the start of a recovery in Israel during 2009, the consensus is that however glad we were to see the end of 2008, 2009 is most likely to be an even harder year for the Israeli economy.