On Wednesday, the Central Bureau of Statistics will be publishing the nation's second-quarter accounts, including Israel's gross domestic product.

To the general surprise, GDP grew in the first quarter. There may be another happy surprise in the second quarter, but it isn't likely.

Key economic indicators already available show deterioration. Second-quarter income tax revenue dropped 6.3% from the first quarter to NIS 20.3 billion (correlated with the level of activity in the business sector, with wages, and with employment).

Government income from customs and VAT, correlated with commercial activity, was NIS 16 billion for the second quarter at June prices a real drop of 5.5% from the previous quarter.

Both indicators are sensitive to deviations caused by the timing of tax payments and rebates, and legislative changes such as the recent 1% hike in VAT to 18%. But there are other indicators that also show economic activity is shrinking.

Exports, which have historically driven Israel's growth, are also falling. Granted, the shekel's erosion lowered the relative price of Israeli export goods. But the global recession and the collapse of tourism to Israel have badly dented exports anyway: from $19 billion in March-April to $17.9 billion in May -June.

Broader indicators also show a slump. The index of combined indicators, which factors in industrial production, volume of trade and services, imports and business-sector jobs dropped 1.3% in the second quarter compared with the prior quarter.

It is rare for the index of combined indicators to rise while GDP drops, or vice versa they usually move in the same direction. In the first quarter, when GDP rose, the index did too. But not in the second: the index clearly showed that the economy retreated.

Some indicators went the other way, but they have less weight that the indicators showing a retreat, and the fundamental feeling that the economy is shrinking.

If one assumes that growth really will be negative in the second quarter, and that the trend won't change in the third quarter, one must conclude that the Finance Ministry's 1% growth estimate for 2002 on which the budget is based will be very, very hard to achieve. Especially if you figure that fourth-quarter growth will be negative too.

Most economists have stopped worrying about the 2002 budget, even though the year's far from over yet. The treasury and government certainly don't want to revisit it, even though circles in Jerusalem are worried that the deficit will be greater than planned the target is 3.9% of GDP.

Analyzing the development of Israel's economic indicators points toward 2002 being a worse year than 2001, when GDP retreated by 0.6%. If so, the deficit will miss its target or the government will have to slam on the brakes and shelve its grandiose plans for 2003, to handle the crisis developing right under its nose.

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