The Bank of Israel research department today published its review of the second half of 2000. The report clearly demonstrates the harm caused to the economy by the resurgence of hostilities between Israelis and Palestinians at the end of the third quarter.

On 2001, the bank predicted that exports would be hurt by the global economic slowdown.

The research department divided the second half of 2000 into two segments: from July to September, before the second

intifada

broke out, and from October to December.

During the third quarter, from July to September, the economy grew quickly. Exports and imports both increased and revenue from taxes grew sharply.

But from October, the business product began to dive. The growth of exports and imports slowed and tax revenue began to limp.

Despite the swing to violence after September and the intensifying uncertainty, the capital and financial markets remained relatively calm, the central bank writes. Prices remained stable, and structural reform continued to take root while hi-tech kept expanding.

The bank noted that third quarter growth was boosted by rising exports, mainly takeovers of startups. But the trend turned in the fourth quarter. The combined index of indicators increased by only 1% in the fourth quarter after growing steeply beforehand. Most sectors reported a drop in activity, mostly due to the resurgence of fighting.

Foreigners comprise 11.5% of total workforce

The central bank's research department gave special attention to tourism and construction, which were both savaged by the

intifada

and the resulting closure of the Palestinian areas.

The separation of Israel and the Palestinian zones starved the construction industry of labor, just as it was showing signs of extracting itself from recession.

Tourist sleep-overs increased by 9% in the third quarter compared with the second quarter, but dropped by 50% in the fourth quarter compared with the third quarter.

The central bank noted that during the third quarter, the total Israeli workforce increased by 18,000 heads, and that unemployment increased to 9%. The number of foreign workers in Israel increased to 211,000 in the second half, or 11.5% of the total workforce.

The deficit in the balance of payments shrank in the third quarter to $200 million, mainly thanks to the leap in export of services to $5.1 billion. Again, the leap is attributed largely to startups.

During the second half of 2000, the research department notes, the consumer price index increased by 0.7%, much the same as in the first half. The shekel appreciated by 1.2% against the dollar, and by 4.7% against the basket of currencies, in annualized nominal terms.

During the second half the central bank reduced key lending rates by an aggregate 1.1%.

For the whole of 2000, the government's spending deficit amounted to 0.6% of GDP, or about NIS 2.8 billion. The bank notes that the government underspent its budget during the first three quarters of 2000, and only ran a deficit in the fourth quarter. The total annual deficit came in lower than 3% of GDP, the target set by law.