- The Washington Times - Monday, January 5, 2004

TEL AVIV — Israel’s economy is recovery modestly after three years of doldrums brought on by the Palestinian uprising and should show solid growth this year, according to economists and business leaders.

Economists are predicting growth of 2 percent to 3 percent this year, after Israel’s gross domestic product shrank in 2001 and 2002, and expanded by 1.2 percent in the past year.

The growth this year, driven by rising high-technology exports, should be enough to produce the first rise in per-capita GDP — a key measure of a nation’s standard of living — after three years of retreat.

The significance of the turnaround goes beyond Israeli wallets. A strong recovery would bolster Prime Minister Ariel Sharon’s government and be a setback for Palestinian militants, who have counted the recession as proof that their campaign of suicide bombings can help them wring concessions from the Jewish state.

“It’s possible to say that this is the end of the recession,” said David Klein, Israel’s conservative central bank chief, in an interview with the Ha’aretz daily. “A year ago, the forecast was far from optimistic. There was no light at the end of the tunnel. But the horizon today is completely different.”

Mr. Klein’s optimism is driven by a revival of Israeli exports, which account for about 33 percent of the country’s economic activity.

A resurgence of worldwide economic activity, as well as a revival of demand for technology products, already is boosting sales of Israeli products abroad. The surging export sector is expected to boost the rest of the economy this year.

Still, analysts cautioned that the recovery will be incremental, warning that the rise in exports won’t be broad enough to ease Israel’s unemployment rate of nearly 11 percent.

With middle- and lower-income earners still feeling pressured by the waves of job cuts during the past three years, Israeli consumers aren’t expected to give an extra boost to the economy.

“It’s a healthy recovery, creating an inflow of foreign currency. But [exports] are just one engine trying to pull a very long train here,” said Gil Bufman, chief economist at Bank Leumi. “It would be better if we had more engines.”

Investors on the Tel Aviv Stock Exchange appear eager to buy into the optimism. The market’s benchmark index rose more than 50 percent in the past year on expectations of a recovery.

Additional evidence for renewed growth can be found among venture capitalists.

In Israel’s technology-dominated economy, venture capital provides a critical pipeline of investment for young companies. After three lean years, venture funds are finding it easier to raise capital from foreign investors.

Chemi Peres, managing general partner of Pitango Venture Capital and head of the Israel Venture Association, predicted that Israeli funds would raise up to $1 billion this year. It still is far from the record $4 billion raised by Israeli venture capitalists in 2000, but it will be a welcome improvement over the past three years.

“Things have stabilized after years of uncertainty. In almost every area, you see interest from investors to put money in new companies,” he said.

Foreign tourism, another victim of Israeli-Palestinian violence, also is expected grow this year.

A far stronger recovery could be expected in the event of a peace agreement with the Palestinians — still a distant prospect — but Israeli businesses have learned how to live with the threat of violence, analysts said.

“These signs of improvement are because after three years of intifada, we got the idea, and the economy has adjusted itself,” said Shmuel Bar, a fellow at the Herzliya Interdisciplinary Center’s counterterrorism institute.

“Obviously, the improvement of the economy improves the all-around feeling. It improves the national resilience.”

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