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The Bank of Israel's Annual Reports are published at the end of March, and are submitted to the Knesset and the Finance Committee of the Knesset in accordance with section 59 of the Bank of Israel Law, 5714-1954. The reports encompass a broad range of areas of economic activity: they review and analyze the economy and economic policy; output, uses, and principal industries; inflation and monetary policy; the financial system; the labor market; general government and how it is financed; the balance of payments; and welfare policy.
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Recent Economic Developments (RED) are four-monthly reviews published about a month after the end of each period. The reviews, illustrated by diagrams, summarize and analyze developments on the real side, in the labor market, in government activity, in the balance of payments, in prices, in monetary policy and the capital market, as well as the main developments world wide. Part 2 of each review presents a broader review of selected issues relevant to the economy. The reviews also contain tables giving the latest data on Israel's economy.
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The Bank of Israel's financial statements are published annually, and contain the Bank's balance sheet as of December 31 and the Profit and Loss Account for the year ending December 31. The reports also contain notes and explanatory remarks to the financial statements, and an annual review of Israel's payment and settlement systems. The reports also have a statistical appendix, with series of annual and monthly data on items in the financial statements.
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The Annual Reviews of Israel's Banking System analyze developments in the banking system with regard to activity, business results and risks, the structure of the system, and the activity of the Banking Supervision Department.
The reports are illustrated by diagrams and contain text tables, as well as a statistical appendix containing detailed data which can researchers and analysts to analyze trends in Israel's banking system.
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Principals
Economic activity recorded some slowdown. The levels of real activity, the foreign trade activity
and the labor market declined, against the backdrop of the negative developments in the global
economy. Nevertheless, the capital market and the states of mind recorded an improvement in the
last month.
Positive Aspects
 The capital market: a positive trend was recorded in capital market activities in February.
This included increases in stock indexes, similar to developments in the world’s leading stock
indexes. Additionally, the corporate bond market recorded moderate increases in indexes1
and
January saw a relatively high volume that was raised. Furthermore, the average yield on marketable
corporate bonds decreased significantly in February, following January's recorded increase.
 New builds recorded a strong increase in the fourth quarter of 2012.
 States of Mind: An improvement was recorded in the public’s states of mind over the past
month. At the same time, the Procurement Managers Index continued to improve, reaching a level
of close to 50 in January, this following an elevation of 5.2 index points. It should be noted that the
improvement trend has been ongoing for three consecutive months, in which the Index has recorded
a cumulative increase of 11.7 index points. Nevertheless, the Consumer Confidence Index continues
to record a downward trend and is currently at the low level that was recorded in 2009.
Unchanged
 Price stability: the rate of inflation in the Israeli economy remains below the mid-point of the
inflation target. The Bank of Israel has not changed the market interest rate. The Consumer
Price Index dropped unexpectedly in January by 0.2%, with a surprising downturn since September
(with the exception of the increase in December). The Consumer Price Index has increased by 1.5%
in the past 12 months. The inflation expectations deriving from the capital market were 2.4% in
1The indexes relate to 60 series of leading linked corporate bonds and the average yield is calculated for all
series of linked marketable bonds (about 500).Economics and State
Revenue Department
2
January, an increase of 0.2 percentage points as compared to November-December 2012, and in
February the expectations further increased to 2.6%. Nevertheless, the Bank of Israel notes that the
data of the inflation expectations deriving from the capital market are upward biased.
The Bank of Israel has maintained the interest rate for March (which is determined at the end of
February) at the same level of 1.75%. According to the Bank, the decision not to change the interest
rate was due to the mixed data of real activity; a slowdown in the economic activity on the one hand
and an improvement in the expectations of the business activity on the other hand. The interest
decision was also influenced by the rate of inflation, which remains below the mid-point of the
Bank of Israel’s inflation target, and developments in the real estate market.
The unchanged interest rate, alongside the increase in the inflation expectations, contributed to the
decrease in the real interest rate, which has been recording negative levels over the past few months.
Warning Signs
 Real activity: in 2012, the economy grew by 3.1%, a significant slowdown in relation to the
growth rates that were recorded in the two preceding years, and a slowdown in the fourth
quarter of 2012 as compared to the preceding quarters. At the same time, a sharp drop was
recorded in the Industrial Manufacturing Index for December 2012. According to the
estimates of the CBS, in 2012 GDP grew by 3.1%, with a similar growth in the business GDP.
Consequently, the product per capita increased by about 1.3% in 2012. In the fourth quarter of
2012, the GDP growth rate was 2.5% at an annual rate only. The slowdown in GDP growth in the
last quarter reflects, inter alia, the effects of Operation Pillar of Defense. The growth in this quarter
was led by a significant expansion of public consumption. On the other hand, investments in fixed
assets, export and import diminished significantly in the fourth quarter and private consumption
recorded a growth rate that is significantly lower than that recorded in the previous quarters of the
year. Additionally, CBS has updated the growth data downward for the previous quarters.The
Industrial Manufacturing Index decreased by 5.3% in December, this in line with the downward
trend of the Index since August 2012. Private consumption indexes reflected a mixed trend, with a
reduction of 2.4% in the Turnover Index for all sectors of the economy in December 2012. This
followed increases in October and November, as opposed to an increase of 1.9% in the Retail
Chain Sales Index in January, in line with the increases recorded in November and December 2012.Economics and State
Revenue Department
3
 Tax collection: in February, a sharp drop was recorded in the collection of taxes, this on the
background of an extraordinary increase in refunds. The reduction was led by a decrease of
approximately 15% in the collection of direct taxes. The collection of indirect taxes recorded a
small increase of about 1%. The low rate of collection in February is accounted for by high refunds
that were given during the month.
 Foreign trade: similarly to December, the decrease in the export of goods and the increase in
the import of goods in December resulted in a higher trading deficit. The export of goods
(excluding ships, aircraft and diamonds) decreased by approximately 2.8% in January as compared
to December. This is the fourth consecutive month with a recorded decrease in the export of goods.
The decline was reflected in all levels of technology, with the exception of mixed traditional
technology sectors. An examination of the trading partners shows a decrease in the export of goods
to Europe as compared to an increase in exports to the United States. The export of services
decreased by 4.5% in December following the increase in November. At the same time, the import
of goods (excluding ships, aircraft and diamonds) surged by approximately 2.8% in January. The
increase was reflected in a significant increase both in the import of consumption goods and in the
import of raw materials. On the other hand, the import of investment products recorded a decrease
for the third consecutive month. As a result of these developments, the trading deficit (excluding
ships, aircraft and diamonds) expanded by 19.8% in January. The rate of incoming tourists recorded
a moderate decline in January, following sharp drops in the rate of incoming tourists in the three
preceding months. It should be noted that the trend of decrease in incoming tourists was evident
even prior to Operation Pillar of Defense, but has apparently become more prominent thereafter.
The real exchange rate of the NIS revalued by 0.7% in January.
 The labor market: a slight decline was recorded in the labor market in January, despite the
reduction in the rate of unemployment. At the same time, the rate of unemployment decreased to
6.5% in January, a reduction of 0.3 percentage points as compared to December. Nevertheless, the
reduction in the rate of unemployment was due to the decrease in the rate of participation.
Accordingly, the decrease in the rate of unemployment was evident in a reduction of 10.7 thousand in
the number of unemployed individuals, alongside a negligible increase of 0.6 thousand in the number
of employed individuals. The increase in the number of employed was seen through in the number of
part-time employed individuals, which was partly set off by a decrease in the number of full-time
employed individuals. Economics and State
Revenue Department
4
The rate of participation in January was 63.4%, a reduction of 0.3 percentage points as compared to
December. This decrease in the rate of participation was reflected in a reduction of 10.1 thousand in
the number of participants. Since August 2012, the rate of participation has decreased by 0.9
percentage points. The number of jobs decreased by 2.9 thousand in January 2013. Since the
beginning of 2012, the number of jobs grew by approximately 112 thousand, originating primarily in
the first half of 2012.
 Global indicators that are relevant to Israel: the developments in the global economy in recent
months were primarily negative; political instability in Italy overcasting the markets, the
coming into effect of a deep cutback in public spending in the United States and the increasing
concern for “currency war” among the developed economies.
Real Estate Sector
In January a decrease was recorded in the number of transactions alongside a
significant reduction in purchases of investment property.
Real Activity -
Taxation -
Foreign Trade -
Labor Market -
Price Stability =
Capital Market +
Relevant Global
Indicators
-
States of Mind +
* Minus/plus indicates the direction of the change in the relevant area as compared to the beginning of the year. =
signifies a similar situation, or that positive and negative indicators bearing similar significance were recorded.
Impro
vemen
t
Deteri
oratio
nEconomics and State
Revenue Department
5
** The location on the scale is subjective and reflects the present position of the areas as compared to its position in
December 2012.
*** A thick continuous line signifies the situation at the end of the relevant month and the thin continuous line signifies
the end of 2012.
Select data
2Unless otherwise indicated in the notes.
3
Based on the new estimate method of the CBS.
Area Indicator Change in January2 Notes
Real Activity
Gross Domestic Product 2.8% Q4 2012 at an annual rate.
Business GDP 3.1% Q3 2012 at an annual rate.
Industrial Manufacturing
Index -5.3% Data for December.
Turnover of Trade Sectors -2.4% Data for December.
Retail Chain Sales Index 1.9% Seasonally adjusted, at fixed prices.
Taxation
Total collection -8.8%
February 2013 as compared to January
2013 (seasonally and legislation changes
adjusted and at fixed prices)
Direct taxes -15.4%
February 2013 as compared to January
2013 (seasonally and legislation changes
adjusted and at fixed prices)
Indirect taxes 1.1%
February 2013 as compared to January
2013 (seasonally and legislation changes
adjusted and at fixed prices)
Foreign Trade
Export of goods -2.8% In dollar terms, excluding ships, aircraft
and diamonds.
Export of services -4.5% Data for December.
Export of goods and services -2.6% Data for December.
Import of goods 2.8% In dollar terms, excluding ships, aircraft
and diamonds.
Labor Market3
Unemployment rate 6.5% (5.5%) Ages 15+. The data in parentheses relate
to ages 25-64.
Participation rate 63.4% (78.3%) Ages 15+. The data in parentheses relate
to ages 25-64.
Price Stability
Consumer Price Index -0.2%
Consumer Price Index in the
past 12 months 1.5%
Inflation expectations 2.6% February, one year forward.
Capital Market
Tel Aviv 100 1.4% February average as compared to January
average.
Tel Bond 60 0.5% February average as compared to January
average.
Total issuances 29.9% January, at fixed prices.
Leading Global
Indicators
S&P 500 2.3% February average as compared to January
average.
Growth forecast for the
United Stated 1.9% For 2013, concensus projection in
February.
Growth forecast for the Euro
Zone -0.1% For 2013, concensus projection in
February.
States of Mind Procurement Managers Index 49.3
An index above 50 reflects anticipation
for the expansion of activity in the
industry. Seasonally adjusted.
Consumer Confidence Index -2.5% Season
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Principals
In November and December economic activity remained stable, with an improvement in the capital
market on one hand and stability in the real economic activity on the other hand. At the same time,
foreign trade activity levels declined.
Positive Aspects
 Price stability: the stability of prices in the market remained high over the recent months, as
the Bank of Israel reduced the interest rate by 0.25% at the end of December and left it
unchanged at the end of January. The Consumer Price Index decreased by 0.5% in November, as
opposed to an increase of 0.2% in December. Consequently, the inflation rate for the past twelve
months reached 1.6% as of December. Inflation projections for the following twelve months
increased to 2.4% in January 2013, as compared to 2.2% in November and December.
The Bank of Israel has unexpectedly reduced the interest rate for January by 0.25% points to 1.75%.
The interest rate for February remained unchanged. The decrease of the interest rate for January
was, inter alia, due to the slowing down of growth in the preceding quarters and the anticipation of
the continuation of this trend in the coming months,
1
the reduced inflationary pressures and the high
level of uncertainty in relation to global risks. The reduction in the interest rate contributed to the
continuing decrease in the real interest rate.
 The capital market: a positive trend was recorded in capital market activities in DecemberJanuary. At the same time, the stock market indices increased moderately in December. On the
other hand, moderate reductions were recorded in the Israeli stock indices during January, despite
the increase that followed the results of the elections. It should be noted that the developments in
1The Bank of Israel anticipates a 3.8% growth in the Israeli economy in 2013, among others, due to the
commencement of the production of gas from the Tamar Field. Nevertheless, the Bank states that, excluding
the contribution of the gas sector, Israeli economy is expected to grow at a rate of only 2.8%, a slowdown in
relation to recent years. The Bank notes that the 1% increase in growth due to the contribution of the gas
sector is not expected to significantly affect the labor market and, accordingly, it anticipates a continuing rise
in the rate of unemployment in 2013.2
the stock indices in January contradicted the developments in the world’s leading indices.
Additionally, the corporate bond market recorded a moderate increase in indics in December2
alongside relatively high volumes raised. Furthermore, the average yield on marketable bonds
decreased in December, but increased at the same rate in January. At the same time, this market is
experiencing an ongoing reduction in the aggregate value and in the number of series.
 Global indicators relevant to Israel: the developments in the global economy in recent months
were primarily positive. Concurrently, the concern for a slide down the fiscal cliff has been
lifted. Nevertheless, leading European countries are still facing weakened economic activity.
 States of mind: In November and December some improvement in the Israeli public state of
mind was recorded. At the same time, the Procurement Managers Index increased by 6 index points
in November and an additional 0.4 index points in December, but is still indicative of an anticipated
reduction in industrial activities. The Consumer Confidence Index also increased in November, by
approximately 2.5%, and remained almost unchanged in December. It should be noted that the Index
level is still low as compared to the first half of 2012.
Unchanged
 Real activity: based on a preliminary estimate of the CBS, the GDP growth rate for 2012 is
3.2%. At the same time, the current activity indices suggest a certain improvement in the
economic activity. The growth in 2012 is low in relation to the years 2010-2011, but is still higher
than in the majority of developed countries. This product growth rate reflects a real growth of 1.5%
in product per capita. The slowdown in product growth is reflected in reduced growth of all product
components, excluding public consumption. Concurrently, the business production grew by 3.2% in
2012.
The Industrial Manufacturing Index increased by 1.7% in November, this following a decrease that
was recorded in October. The private consumption indices reflected a mixed trend, with a reduction
of 2.4% in the Trade and Services Sectors Turnover Index in November (following an increase in
October), as opposed to an increase of 1.1% in the Retail Chain Sales Index in November (in line
2The indices relate to 60 series of leading linked corporate debentures and the average yield is calculated for
all series of linked marketable debentures (about 500).3
with the increase recorded in November and contrary to the negative trend recorded in previous
months).
 Taxes: decrease in tax collection in January, following a significant increase in December. The
total tax collection decreased by 2.6% in January as compared to December (data seasonally
seasonally adjusted), following an increase of 6.4% in tax collection in December. The reduction in
total collection was due to a sharp drop of 11.0% in the collection of direct taxes, which followed an
increase of 14.5% in December. The reduction in the collection of direct taxes was partly offset by
an increase of 6.3% in the collection of indirect taxes in January, which followed an increase of
5.5% in December.
 The labor market: in November-December (cumulative) there were no significant changes in
the labor market. At the same time, the rate of participation decreased to 63.7% in December, a
reduction of 0.2 percentage points as compared to November, similarly to the level recorded in
October. Concurrently, the unemployment rate amounted to 6.9% in December, an increase of 0.1
percentage points in relation to November (that recorded a decrease of 0.2 percentage points in the
unemployment rate). Despite the slight increase in the rate of unemployment in the economy, this
rate is low in relation to the majority of OECD countries. Since the beginning of 2012 about 116,000
employees were added to the Israeli economy.
Warning Signs
 Foreign trade: the increase in the import of commodities and the reduction in the export of
commodities in December resulted in a higher trading deficit. The export of commodities
(excluding ships, aircraft and diamonds) decreased by approximately 1.4% in relation to November,
with a decrease of approximately 3% in 2012 (2012 average as compared to the 2011 average). The
decrease was reflected in the mixed high-tech sectors, as opposed to an increase in other levels of
technology. An examination of the trade countries shows a decrease in the export of commodities to
the United States as compared to an increase in exports to the European Union. The export of
services increased by 6.2% in November following the reductions recorded over the two preceding
months.
At the same time, the import of commodities (excluding ships, aircraft and diamonds) increased by
approximately 4.4% in December, this following a sharp drop in the previous month. The increase
was reflected in the import of investment products, as opposed to a reduction in the import of
consumables and of raw materials excluding energy. Additionally, in December the volatility in the 4
import of energy materials continued, with an increase of approximately 21.0% in this component
in December (original data). Following the developments in the import and export of commodities,
the trading deficit (excluding ships, aircraft and diamonds) increased by approximately 28% in
December.
In December, the rate of incoming tourists decreased by 4.4%, following reductions in the three
preceding months. It should be noted that the trend of decrease in incoming tourists was evident
even prior to Operation Pillar of Defense, but has apparently become more prominent thereafter.
The real exchange rate of the NIS has revalued by 2.1% in December.
Real Estate Sector in November-December 2012
In November-December an increase was recorded in the number of transactions, yet the
weight of investors in total transactions continues to drop. Preliminary data for January
indicate a significant increase in total transactions.
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The change in the state of each of the aforementioned areas is graphically presented in the document. The change is in relation to the preceding month, the current month being marked with a continuous line and the preceding month represented by an intermittent line. The length of the arrow reflects the intensity of the change in each of the areas based on a qualitative assessment.
Additionally, the graphic presentation is accompanied by minus or plus signs that indicate the direction of the change in the relevant area as compared to the preceding month, with plus marking a positive change and minus marking a negative change. The equals sign (=) indicates that the condition in the current month is similar to that in the preceding month, or that positive and negative indicators bearing similar significance were recorded.
The document focuses on the analysis of developments in the aforementioned areas and no weighing is performed for a general index. The purpose of the document is to identify the trends and turning point in each specific area.
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Most of the data that are used in preparing the analysis are published by the Central Bureau of Statistics, the Bank of Israel and the Stock Exchange and are available to the public. Additionally, we have in our possession data that are produced within the Ministry, such as tax collection data and real estate data. The analysis presented in the Monthly Review is based on data that are often retroactively updated and the availability of which differs between the various items of data. Consequently, the analysis presented for July will be partly based on data depicting the developments in June (which are published in August), such as the Industrial Production Index. To the extent possible, we use seasonally adjusted series. . This allows for the comparison of economic developments over time. The data presented in the Review, which is based on data series with a daily frequency, is calculated on the basis of monthly averages.
Following is a partial list of the indicators that we examine as part of the analysis, distributed by the various chapters.
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The real activity area includes the product growth data on its various components and the activities in industry and in trade sectors. The majority of the indicators in this area are published relatively late. The CBS publishes a preliminary estimate of the national accounting data about a month and a half following the end of every quarter. The industrial production data and the turnover of trade sectors data are published about a month and a half after the end of every month.
Accordingly, the national accounting data that are presented in the Review are for the preceding month, whereas the industrial production data and the turnover of trade sectors index are two months behind (for example, the Review published at the beginning of August will present national accounting data for the second quarter and industrial production and trade sectors’ turnover data for June).