Companies Survey for the Fourth Quarter of 2010

Business activity continued to expand in the fourth quarter of 2010, at a pace similar to that since the beginning of the year.
All the principal industries reported increased activity.
For the first time since the start of the recovery from the global crisis, services exports increased.

In all industries expectations are for continued expansion in activity in the next quarter, including the manufacturing industry in which in the previous Survey companies had reported expectations of a slowdown.
The average twelve-month-forward inflation expectations of the companies participating in the survey was unchanged from that in the previous quarter, at 2.65 percent.

A quarter of the companies that participated stated that they thought the government planned tax cuts would increase their investment. Thirty-eight percent of the companies thought that the program would be implemented in full, and about half thought that it would be implemented in part.

Reports from companies participating in the Survey show that economic activity continued to expand in the fourth quarter of 2010, and that the increase is expected to continue in the first quarter of 2011.

Reports from companies in the manufacturing sector show that the expansion of activity continued in the fourth quarter of 2010, with both domestic and export sales increasing. Companies also reported a rise in the number of their employees, and a marked and continued increase in their utilization of machinery and equipment. The expansion was reflected in a significant increase in the net balance––the difference between the share of companies reporting an increase in activity and the share of those reporting a decrease. The significant increase in activity occurred in contrast to companies’ expectations in the previous quarter, when they predicted a slowdown in the fourth quarter. They reported increased orders from the domestic market and from abroad, reducing the probability of a slowdown in this industry in the first quarter of 2011.

Trading companies reported a moderation in the rate of increase in the volume of sales in the fourth quarter, compared with the increases in the previous quarters. The number of employees did not increase, similar to the situation in the previous quarters. Companies expect further increases in sales in the next quarter.

Business services companies reported a significant increase in activity, due in part to growth in domestic sales, as in the previous quarters, and for the first time since the start of the recovery from the global crisis services higher exports also played a role in the increase. The number of employees increased, as did domestic and export orders for the next quarter.

Most hotels reported a rise in activity in the fourth quarter similar to the continued rise since the beginning of the year. It should be emphasized that the net balance in this industry expresses the change from the equivalent period in the previous year, in this case 2009:Q4, when the effects of the crisis were evident and activity in the hotel industry was in recession. The increase in activity derived mainly from the increase in foreign tourists' bed nights, but bed nights of Israel's also rose. The positive picture that emerges from the net balance is also seen from an analysis of the constraints on activity, with hotels reporting an easing in their severity, and in particular the constraint of the number of foreign tourists was much less severe than in the past..

In transport and communications, activity continued to expand in the fourth quarter, based on sales of services to nonresidents. Sales to Israelis did not change, and in communications actually declined a little. This served to lower the net balance of total activity. The more moderate increase was also reflected in companies’ reports of the change in the number of employees. On the other hand, the rate of equipment utilization increased, and expectations are of a further increase in activity in the next quarter.

Construction companies reported increased activity in the fourth quarter, which was most notable in the large companies. Companies also reported a decline in the number of employees, increased severity of the constraint caused by the shortage of skilled workers, and that land prices constituted a constraint on the expansion of activity. Demand constraints are not serious, however; against the background of buoyant demand and the supply-side constraints, construction companies reported a rise in output prices.

Companies' inflation expectations for the next twelve months (January to December 2011) averaged to 2.65 percent, within the target inflation range, and close to the average in the third quarter. The share of companies expecting inflation in the next twelve months to be within the range of the price stability target (1–3 percent annual inflation) remained at 80 percent, the same as in the previous quarter, and the share of companies expecting inflation to be above the upper limit of the target range also remained unchanged, at 16 percent.

The distribution of companies' expectations regarding the development of the NIS/US$ exchange rate. Companies expected that in twelve months time (at the end of 2011) the average rate of exchange will be NIS 3.78 to the dollar. Companies expected that the average rate of exchange at the end of the first quarter of 2011 will be NIS 3.69 to the dollar. It should be noted that the average exchange rate at the time the companies completed the survey questionnaire was NIS 3.57 to the dollar.

The Research Department reports that the findings of the Companies Survey for the fourth quarter of 2010 are based on the responses of 602 companies in various sectors of the economy. The research questions are qualitative: companies are asked to report on the direction of change of the various variables—increase, decrease, or stability—and to indicate the intensity of the change—"great" or "slight". The results are analyzed by means of the "net balance," which is defined as the difference in the overall reports between the percentage of companies reporting an increase and the percentage reporting a decrease. In calculating the net balance, the direction of change as reported by the companies is taken into consideration, but not its intensity. Therefore, a net balance of zero indicates stability in activity, a positive net balance indicates an increase, and a negative net balance a decrease. The intensity of the change can be inferred from the size of the net balance. The Research Department adds that the data of the Companies Survey generally matches the macroeconomic and industrial data of the economy. The advantage of the data in the Survey lies in their being readily available and their providing rapid information relative to other data sources (national accounting data and current indictors, such as industrial production).

One-off question regarding the tax-reduction program

According to existing legislation, the rates of corporation tax and income tax are expected to reduce gradually until 2016. In light of these expectations, companies were asked for their reaction to the changes. The responses show that 38 percent of companies believe that the program will be implemented more or less in full, and about half think that it will be implemented in part. Almost a quarter of the responding companies stated that the program would increase their planned investment.