Bank Hapoalim(TASE: POLI )is pessimistic about 2002. Chief economist Ptachia Bar-Shavit doubts that fiscal and monetary policies will pull Israel out of recession. He noted that while the deficit target of 3% of gross domestic product essentially takes into account the drop in revenues, it disregards the additional budget required to meet economic growth targets. Among unaddressed investment needs are infrastructure and massive support for business sector job reation.

Despite the sharp interest rate cut of 2%, Bar-Shavit believes that the monetary policy is still neutral and even somewhat restrictive. He uses two tests to illustrate this. First, the 3.8% interest rate is still higher than the 3.3% expected nominal growth in GDP (0.8% real economic growth, plus 2.5% expected inflation). Second, the interest rate is still higher than inflation expectations, placing real interest in positive territory.

The bank's economists estimate that the dollar will strengthen against the shekel to NIS 4.6 to NIS 4.7. They maintain the gains will be curbed later in the week or early next week even without the intervention of the Bank of Israel. The economists expect a turnaround of the present trend, and that the shekel will strengthen against the dollar. They expect that in the second half of 2002, inflation will resume.

Bank Hapoalim estimates inflation will come to 3% in 2002, the upper limit of the government's target. The bank expects that in January the consumer price index will rise by 0.5% and 0.7% in February.

TST Recommends

Due to the recession, the bank expects a deviation from the deficit target (3% of GDP) again this year. The economists estimate that the deficit will exceed 4% of GDP, even assuming the implementation of additional budgetary cuts in the course of 2002, and additional taxes.

The bank is likewise gloomy about unemployment, which the bank estimates will worsen to 10.3%. The economists estimate that real wages will remain unchanged in 2002. Based on the bank's estimates, recession is expected to also hurt private consumption, which is likely to rise by just 1.5%. This amounts to a 1% drop in per capita product.

The bank expects a 1.2% drop in exports, while imports remain stable. The bank estimates that the balance of payments deficit will rise slightly to some $3.6 billion.