The research department of Bank Hapoalim is bearish on a rally in the second half of 2002. Nor does it foresee much of a recovery in 2003 either, says chief analyst Ptahiya Bar-Shavit.

The team, headed by Bar-Shavit, expect the Israeli economy to shrink by 1% this year, which is about the same as Bank Leumi estimates.

For 2003, the Hapoalim team sees growth of only 2%, which means negative growth per capita, indicating that the population will grow faster than the nation's domestic product.

The steep decline evident in the last quarter of 2001 was curbed to a degree in the first half of 2002, Bar-Shavit wrote in a report. But the rally foreseen by many for later this year or 2003 is not on the horizon, he concluded.

Hapoalim's assessment is relatively pessimistic. Bank Leumi's chief economist, Gil Bufman, estimates 3.1% growth in 2003, which would comprise positive growth per capita.

Hapoalim and Leumi concur that unemployment is unlikely to worsen in 2003. Both banks see it remaining at about 10.8%.

The trend slope of private consumption is steeply down, Bar-Shavit wrote. He sees consumption dropping by 2% a year in 2002 and 2003, which translates to an 0.5% drop per capita. Public consumption, which is expected to increase by 3% this year, will ebb to 2% in 2003 because of budgetary constraints, he predicts.

Investment in fixed assets should increase by 1.7% in 2003, Hapoalim calculates, after dropping 6.6% in 2001 and 3.8% in 2002.

The bank sees exports increasing by 4.5% in 2003 after eroding by about that in 2002, based on the real devaluation of the shekel and the global economic rally.

Hapoalim sees inflation sharply slowing in the second half of the year, reducing the annual rate to 1.3%, from 6.3% in the first half.

Bar-Shavit predicts that consumer prices will increase by 7.7% this year, and about 3.5% in 2003.

He sees Bank of Israel interest rates falling to 8.5% by year-end, from 9.1% at present. But monetary policy will remain restrictive until the end of next year, he warns, partly because of the bitter lessons of this year,

Bar-Shavit does not see the government staying within its budget deficit target of 3.9% for 2002 and 3% for 2003. He estimates that the deficit will climb to 4.5% of GDP this year, and to 3.5% of GDP next year.