Fischer sees no recession in US, Europe
Bank of Israel governor convenes press conference on global economic crisis, says Israel 'can ride through this period successfully if we run the economy in a responsible and organized manner'
Speaking in a press conference he convened on Tuesday to discuss the recent economic developments in the world, Fischer said Israel "can ride through this period successfully if we run the economy in a responsible and organized manner."
"Talks are of a 2.5% growth in 2012 – that's not impressive and not close to the potential growth rate, but it's a relatively good growth rate."
"The forecast for all of Europe hasn't dropped much since the beginning of the year. The expectation for European growth next year is less than 0.5% - that's not a recession, but an undesirable situation."
Fischer described two scenarios which may develop following the situation in Europe: "The first, as a result of heroic efforts, the eurozone survives in its current composition, including Greece.
"This requires the eurozone governments to make extremely tough decisions, mainly the countries facing problems but also other countries in Europe, which will have to consider ways to finance their countries and banks so as not to reach a situation of bankruptcy.
"The second scenario is that the eurozone will start collapsing. It may begin with Greece leaving the eurozone, but there are other possibilities that what happened to Greece will lead to the departure of other countries.
"A huge financial problem in Europe will damage the entire world. Uncertainty today is very high, and it's a negative growth factor there and in the entire world… The ramifications are very hard to predict.
"What happened in Argentina in 2001 and 2002 – there were very radical things in the banking system there, and Argentina emerged from what happened then, but it didn't seriously affect other South American countries.
"The growth in the global economy and mainly in Europe will be very slow or negative, and if there's a separation between northern and southern Europe, there will be a great appreciation in northern Europe, which will cause damage to their economies as they rely on exports."
'Effects of slowdown can be reduced'
Moving on to discuss the Israeli economy, Fischer said Israel's growth rate was beginning to slow down. In order to tackle this situation, he said, the economy's solidness must be strengthened.
"One of the most important things is to maintain the budget framework – not to increase tax rates and let the automatic stabilizers do their work."
Fischer added that "the budget deficit is expected to grow, and that will require cutting government expenses or raising tax levels. The moment the Israeli government has a problem in funding the government, the government expenses, the markets will have to respond. The markets are not very generous – the moment they feel things are going the wrong way, the interest rates start climbing.
As for the problems in funding government expenses, Fischer said "we must not give into populism. It kills economies."
The governor noted that "the Israeli economy is in a relatively good situation. The budget deficit is expected to be smaller compared to the world – around 3% and a bit more. The economy's inflation rate is low and is expected to stay low.
"Unemployment is at its lowest rate in the past 30 years. The financial system is solid, and we have high foreign currency balances. We've found gas and have assets compared to our ability to run the economy and maintain its situation.
"If we succeed in understanding the situation in the global economy and the risks stemming from this situation and if we act responsibly – in the private sector as well – we'll be able to deal successfully with the risks we are facing.
"It’s not that we won't be affected and won't see a slowdown in the growth, but we'll be able to emerge from these problems relatively easily in a similar situation to the previous crisis."
Treasury: Economic fears increasing
Meanwhile Tuesday, the Treasury issued its review of the Israeli economy's situation in September, noting that "the negative economic developments in the global economy and eurozone in particular affected the economic activity in Israel in September.
According to the Treasury, "The main areas causing concern are tax collections, foreign trade, the labor market and the capital market. The deterioration in these fields in recent months is expressed in the public's state of mind, which points to increased fears as to the economic developments."
The Treasury statement added, "On the backdrop of the eurozone debt crisis, the International Monetary Fund has updates the global growth and trade forecasts. The US and eurozone's growth forecasts have been downgraded. And yet, it's important to note that the IMF economists still expect economic growth in those countries.
"The deterioration in the public's state of mind in July and August continued in September as well. The Purchasing Managers Index (PMI) recorded a sharp drop in September, and for the third month in a row has been pointing to shrinkage in the industrial activity.
"It should be noted that the index is in its lowest level since May 2009. The most significant components to record a sharp drop were local demands and employment, which point to an expected shrinkage in activity.
"Throughout September, a drop has also been recorded in the Consumer Trust Index, which reflects the public's evaluation of its economic and employment situation."
As for income tax, the Treasury reported of a 1% drop in income in September compared to August, while October recorded a further 1.6% decline. A NIS 2.6 billion ($700 million) deficiency was recorded in tax collection in January-October 2011 compared to the target set in the State Budget.
