Bank of Israel governor, David Klein, recently assured the Knesset, the Israeli parliament, that the economy, which posted a growth rate of 2.2 per cent last year, had turned the corner. Economists and the business community agree. They expect an improved performance this year. The recovery began in the fourth quarter of last year, although unemployment remained high, accounting for about 9 per cent of the workforce. The Federation of Israeli Chambers of Commerce (FICC), which represents the interests of the country's business sector, predicts gross domestic product (GDP) growth between 4 and 4.5 per cent, adding that GDP per capita will also increase slightly. Factors on which the organisation's forecast are based 'indicate a turnaround', and the 'end of the longest recession in history'. But the federation cautions that the economy is in a state of transition. Bank Hapoalim, Israel's largest bank, forecasts a growth rate similar to that predicted by the FICC. Chief economist Ptachia Bar- Shavit told the South China Morning Post from Tel Aviv, that the recovery had begun in the second quarter of last year. Mr Bar-Shavit forecasts 4 per cent GDP growth for the year. 'Indicators for the first quarter show a 4 per cent growth rate,' he said, while cautioning that the 'economy's growth potential could be achieved if a more balanced economic policy is found between growth and stability.' Exports and investment will fuel the growth along with an upturn in private consumption. As economies worldwide continue to recover, Israel's foreign trade, much of it with the US and the European Union, is also expected to pick up. Exports account for 36 per cent of the country's GDP, while imports make up 46 per cent, reflecting Israel's vulnerability to foreign trade, an economic study by Bank Hapoalim notes. 'We forecast continuing high growth rates in foreign trade,' Mr Bar-Shavit said. 'The current account deficit is expected to decline to US$1.7 billion this year, from US$2.6 billion in '99, because of an increase in exports and a decline in imports.' Industrial exports (excluding diamonds) were worth US$17 billion last year, and made up the biggest share of exports. The hi-tech sector accounts for three-fourths of industrial exports, Mr Bar-Shavit noted. Israel's Consul-General in Hong Kong, Uri Halfon, says hi- tech in all its manifestations - agro technology, biotechnology, software, electronics, the Internet, encryption and data security technology and data communica tions - has become a key driver in the economy and helped the country achieve 'technological superiority'. Graduates of the Israeli Defence Forces spearheaded the hi- tech boom, turning cutting-edge defence technology into civilian applications, Mr Halfon said. The shift from an economy based on traditional industries such as agriculture and textiles, to high technology accelerated in the past decade, he said. Today, the industry is a major exporter. According to the Ministry of Industry and Trade, hi-tech exports increased 5.1 per cent last year to US$8.3 billion. Despite the poor economic performance last year, exports to Hong Kong increased nearly 36 per cent to US$793.3 million, according to Gal Manor-Peleg, Israel's commercial attache. Israel imported from Hong Kong, goods and services worth US$635 million, an increase of 19 per cent. As co-operation in the technology sphere expands, bilateral trade is expected to improve. Investment capital from Hong Kong has begun trickling into Israel. 'In the first three months, US$150 million went into venture capital funds,' he said. Although the economy is recovering and exports are rising, Israel's unemployment situation is unlikely to ease. In the first two months, the jobless rate surpassed 9 per cent. But, of course, more people are also entering the workforce. 'The labour force increased by 112,000, or by 5 per cent last year, and the number of employed people increased by 85,000, or 4 per cent,' Mr Bar- Shavit said. Inflation, on the other hand, has eased, dipping to 1.2 per cent in the first quarter. This was mainly because of strict monetary and fiscal policies, Mr Bar-Shavit said. He expects the Bank of Israel (the central bank) interest rates to be cut to 9 per cent or slightly less by year's end. This is because of low inflation and the domestic currency, the shekel's appreciation against the US dollar. Overall, Mr Bar-Shavit said, the forecast growth rate of 4 per cent was 'two percentage points less than the economy's potential growth rate'. To attain the potential, he said, the government needed to strike a balance between growth and stability.