ISRAEL'S DEFICIT STRANGLES INTERNAL DEMAND.

PositionRecent rise in interest rates and weak consumer confidence will hurt spending in 2003 - Brief Article

Israel's burgeoning national deficit is strangling private spending among households and businesses. The two leading enemies of spending in 2003 will be weak consumer confidence and the recent increase in interest rates.

Israeli household budgets are feeling the impact of the worst recession in recent history, which got its start in 2001 and could well linger into 2003. Most Israeli households are likely to keep high-end purchases on hold through at least the first three quarters of this year, hoping for a calm in the geopolitical storm. As real interest rates jumped from a record low of 0.8 percent in January of 2002 to 7.3 percent in September, consumers were put off by rising finance costs. Interest rates should ease during the first half of 2003, but not enough to make consumers loosen their purse strings.

The service sector, which accounts for almost 60 percent of Israel's GDP, will remain very depressed through most of 2003. The high level of tension in the Middle East will keep tourists at bay. That, in turn, will put downward pressure on sales of a host of service companies that directly or...

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