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September 2012
The Israeli EconomyStrengths and Challenges
• GDP ($ Billion) 244
• Population (6/2012, Million) 7.9
• GDP per capita ($) 31,385
• Foreign Trade (% of GDP) 75%
• Total Exports (% of GDP) 37%
• Unemployment (7/12) 6.5%
• Business Sector share in GDP 72%
• Industry share of business sector 21%
The Israeli Economy – 2011 Facts & Figures
The Manufacturers' Association of Israel 2
MainMain
Strengths & Opportunities Strengths & Opportunities
Towards 2013 Towards 2013
The Manufacturers' Association of Israel
3
Strengths & Opportunities
The Manufacturers' Association of Israel 4
• The Resilience of Israeli Economy during 2008/9 Crisis
• Strong starting point towards 2012
• Export oriented growth
• High-tech oriented growth
• World leadership in civilian R&D investments
• Conservative approach
• Responsible fiscal policy
• Diversion of Trade towards developing countries
• Attractive Corporate tax
0.8%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
Fin
lan
d
Ru
ssia
Irel
and
Mex
ico
Jap
an
Sw
eden
Ital
y
UK
Ger
man
y
Tu
rkey
Den
mar
k
Net
her
lan
ds
Au
stri
a
Sp
ain
Bel
giu
m
Po
rtu
gal
US
A
Can
ada
Fra
nce
Gre
ece
Sw
itze
rlan
d
So
uth
Afr
ica
New
Zea
lan
d
No
rway
Bra
zil
Sau
di
Isra
el
Au
stra
lia
Po
lan
d
Ind
ia
Ch
ina
Source: IMF October 2010
Developed and selected major emerging market countries,Real GDP growth, 2009
Positive Growth in Israel Vs. Regression in Most Developed Countries
The Manufacturers' Association of Israel 5
4%
-1%
-4% -4%-5%
-6%
-9%-10%-10%-11%-11%
-12%-12%
-15%-16%
-17%-18%-18%
-21%
Real Industrial Output Change, 2009 compared to 2008
ʺ ʥhʥ́ʤ̋ ʥhʩʣʮʤʯʩʡʤʩʩ́ ʲ ʺ ʤʩʢʥʥʩɦʺ ʥyʣʢʤʡʭʩʬʷʭʩʬʣʡʤʭʩʮʩʩ̫ʥʯʫ̋ ʩ
Relatively Moderate Regression in Israeli Industry during 2008/9 Crisis
Source: OECD, CBS & MAI Economic Research Department
The Manufacturers' Association of Israel 6
Nominal Change in Average Apartment Price, 1997-2007
Relatively Moderate Increase in Real Estate Prices Before 2008/9 Crisis
Source: Psagot Investment House.
The Manufacturers' Association of Israel
7
Relatively moderate Dismissals During 2008/9 Global CrisisEmployee Jobs in the Business Sector
8 The Manufacturers' Association of Israel
5.4%4.9%
4.2%
3.3%
0.9%
-0.7%
-1.7%-1.8%
0.2%
2.8%
4.5%4.3%4.5%4.3%4.1%4.3%
2.8%2.4%
1.7%
Employee Jobs in Business SectorChange Rates, Each period Compared to the Parallel Period in a Previous Year
80%
30%
7%
15%
6%
11%
Reducing Overtime
At the expense of employees' vacation days
Unpayment vacation
At the expense of employees vacation days
while lowering wages
Reducing job scopes while lowering wages
Efficiency Measures Taken by Industrial CompaniesTowards all Employees, Excluding Management
Employment Flexibility During 2008/9 Crisis
Source: MAI Economic Research Department, Survey - February 2009
The Manufacturers' Association of Israel
Concentrated vacation
Shortened workweek
9
Strengths & Opportunities
The Manufacturers' Association of Israel 10
• The Resilience of Israeli Economy during 2008/9 Crisis
• Strong starting point towards 2012
• Export oriented growth
• High-tech oriented growth
• World leadership in civilian R&D investments
• Conservative approach
• Responsible fiscal policy
• Diversion of Trade towards developing countries
• Attractive Corporate tax
Rapid Growth in Israeli Economy2004 - 2011
The Manufacturers' Association of Israel 11
GDP GDP per Capita Business Sector GDP
5.0%
3.4%
6.8%
5.1%
3.3%
6.2%5.7%
3.8%
7.0%
5.3%
3.4%
5.9%
4.2%
2.4%
4.7%
0.8%
-0.9%
0.3%
4.8%
2.9%
5.8%
4.8%
2.8%
5.3%
Real Annual Changes
2.6%
0.3%
-1.8%-2.2%
-4.9%
-0.9%
-1.6%
0.5%
1.7%
3.1%
5.0%
2.9%
0.8%
3.6%
2.9%
0.1% 0%
A Surplus in The Balance of Payments Current AccountAs Percentage of GDP
Independent of Outside Funding A Decade of Current Account Surplus
Source: ICBS, 2012 Forecast – MAI’s Economist Research department.
The Manufacturers' Association of Israel
12
The combination of a continual surplus in the current account and the large amount of foreign currency reserves, enable Israel to provide its import needs without dependence on external financing.
Companies & Individuals Lend Money to the World
Source: Interdisciplinary Center (IDC) Herzliya.The Manufacturers' Association of Israel
-70
-60
-50
-40
-30
-20
-10
0
10
20
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Q2 20
09
Q3 20
09
Q4 20
09
Q1 20
10
Q2 20
10
Q3 20
10
Q4 20
10
Q1 20
11
Q2 20
11
Q3 20
11
Q4 20
11
$B
illi
on
s
13
Net External Debt*(-) Sign: the economy is a net lender abroad
Net external debt: External debt less foreign assets in debt instruments (excluding share capital).
14
The Manufacturers' Association of Israel
Strengths & Opportunities
• The Resilience of Israeli Economy during 2008/9 Crisis
• Strong starting point towards 2012
• Export oriented growth
• High-tech oriented growth
• World leadership in civilian R&D investments
• Conservative approach
• Responsible fiscal policy
• Diversion of Trade towards developing countries
• Attractive Corporate tax
Export Oriented Growth
The Manufacturers' Association of Israel 15
7%
41%34% 27% 31%
54%62%
80%
102%
120%
102%
134%
146%
0%
1%
12%
6%
4% 4%11%
15%
26%32%
42%
33%
44% 47%
Industrial Exports
Industrial Production
Export = 42% of Sales
Export Oriented Growth in IndustryReal Cumulative Rate of Change, Since 1998
Export = 31% of Sales
16
The Manufacturers' Association of Israel
Strengths & Opportunities
• The Resilience of Israeli Economy during 2008/9 Crisis
• Strong starting point towards 2012
• Export oriented growth
• High-tech oriented growth
• World leadership in civilian R&D investments
• Conservative approach
• Responsible fiscal policy
• Diversion of Trade towards developing countries
• Attractive Corporate tax
The High Tech Sector Contribution to Industrial Growth
The Manufacturers' Association of Israel 17
2004– 2011
To Industrial Output To Employment in Industry
To Industrial Export
73%
63%
74%
The High Tech Sector Contribution to Industrial Growth in 2004-2011
As Percentage of Total Growth
The Israeli Industry is Undergoing Long term Structural Changes
The Manufacturers' Association of Israel 18
29%21%
37% 33%
39%
35%
39% 39%
32%43%
24% 28%High Tech
Mixed Tech
Low Tech
ʩhʡʮʩʥhʩ́ʬʹ ʩ̋ʰʹ ʡʸ ʪʩʬʤ̋ ʺ ʸ ʡʥ̡ʤʩʩ́ ʲ ʺ ʤ
Production Distribution Employment Distribution
High Share of ICT in the Business Sector
ICT= Information & Communications Technologies, 2008
Source: Israeli CBS
The Manufacturers' Association of Israel
16.1
13.913.0
12.2
10.49.9 9.69.0 9.0 8.8 8.8 8.2 8.2 8.1 7.8
7.2 7.1 7.1 6.7 6.4 6.3 6.2 5.9 5.8 5.7 5.75.0
3.7
ICT Sector GDP, Out of The Business Sector GDP 2008
2010
15
.7%
19
20
The Manufacturers' Association of Israel
Strengths & Opportunities
• The Resilience of Israeli Economy during 2008/9 Crisis
• Strong starting point towards 2012
• Export oriented growth
• High-tech oriented growth
• World leadership in civilian R&D investments
• Conservative approach
• Responsible fiscal policy
• Diversion of Trade towards developing countries
• Attractive Corporate tax
World Leadership in Civilian R&D Investments
Source: Israeli CBS
The Manufacturers' Association of Israel 21
4.3%3.9%
3.6%3.3% 3.3%
2.7%2.5%
2.2%2.0%
1.8%1.6%
1.3% 1.3%1.1%
Israel is The World Leader in Civilian R&D InvestmentAs Percentage of GDP, 20
201
4.%
Global R&D and Innovation Center
The Manufacturers' Association of Israel 22
23
The Manufacturers' Association of Israel
Strengths & Opportunities
• The Resilience of Israeli Economy during 2008/9 Crisis
• Strong starting point towards 2012
• Export oriented growth
• High-tech oriented growth
• World leadership in civilian R&D investments
• Conservative approach
• Responsible fiscal policy
• Diversion of Trade towards developing countries
• Attractive Corporate tax
Israel
Switzerland
BelgiumGermany
Australia
SwedenIreland
NorwayAustria
Netherlands
Slovak RepublicUnited States
Italy
Czech RepublicPoland
Canada
KoreaHungary
JapanFinland
Estonia
New Zealand
13.011.4
11.211.0
9.79.7
9.48.0
7.55.55.4
4.74.5
4.23.9
3.83.13.02.9
2.21.4
0.8
Househld saving rates - Percentage of disposable household income, 2011High Private Saving Rate in Israel
The Manufacturers' Association of Israel Source: OECD & BOI
24
25
The Manufacturers' Association of Israel
Strengths & Opportunities
• The Resilience of Israeli Economy during 2008/9 Crisis
• Strong starting point towards 2012
• Export oriented growth
• High-tech oriented growth
• World leadership in civilian R&D investments
• Conservative approach
• Responsible fiscal policy
• Diversion of Trade towards developing countries
• Attractive Corporate tax
Relatively Low Government Deficit in Israel
The Manufacturers' Association of Israel
Source: IMF, Caesarea Forum, The Israeli Democracy Institute (IDI).
26
11.7%
10.0%
8.1% 8.0%
6.0%
4.6% 4.5% 4.5%3.7%
3.4% 2.9%2.5% 2.4%
1.4%0.8%
0.1%
Israel’s Government Deficit is Relatively LowAs Percent of GDP, 2012
Source: IMF
Continuous Reduction of Public Debt Ratio
The Manufacturers' Association of Israel
Source: Bank of Israel.
27
99.3 97.793.7
84.778.1 77.1 79.5
76.1 74.2 74.2
2012F
Reduction of Public Debt RatioPublic Debt as Percentage of GDP
Relatively Low Public Debt Ratio
The Manufacturers' Association of Israel
Source: IMF, Caesarea Forum, The Israeli Democracy Institute (IDI).
28
229.8%
160.8%
120.1%106.8%105.0%102.9%98.5%
86.3%82.5%81.5%74.2%72.2%68.5%66.2%55.4%
48.6%46.4%35.5%
Relatively Low Public Debt RatioAs percent of GDP, 2011
source: IMF
Israel Credit Rating
• September 2011 – S&P raised Israel’s credit ratings to A+ from A.S&P mentioned that their ratings on Israel are supported by their view of its "prosperous and resilient economy, strong institutions, ongoing fiscal consolidation, and robust external performance."
• December 2011 – Moody’s affirms Israel’s A1 rating.
The Manufacturers' Association of Israel 29
30
The Manufacturers' Association of Israel
Strengths & Opportunities
• The Resilience of Israeli Economy during 2008/9 Crisis
• Strong starting point towards 2012
• Export oriented growth
• High-tech oriented growth
• World leadership in civilian R&D investments
• Conservative approach
• Responsible fiscal policy
• Diversion of Trade towards developing countries
• Attractive Corporate tax
Other Asia US EU
23%
15%
28%
34%
24%
19%
24%
32%
24%
22% 23%
31%
Jan.- July 2012
Distribution of Israel's export of goods by trading blocks,Excluding Diamonds
Diversion of Trade to Asian Countries
The Manufacturers' Association of Israel 31
41%
70%
14%
24%
32
The Manufacturers' Association of Israel
Strengths & Opportunities
• The Resilience of Israeli Economy during 2008/9 Crisis
• Strong starting point towards 2012
• Export oriented growth
• High-tech oriented growth
• World leadership in civilian R&D investments
• Conservative approach
• Responsible fiscal policy
• Diversion of Trade towards developing countries
• Attractive Corporate tax
IrelandChile
GreeceIceland
UKFinland
NetherlandsAustria
IsraelOECD average *
CanadaItaly
NorwaySpain
AustraliaGermanyPortugalBelgium
FranceUS
Japan
13%17%
20%20%
24%25%25%25%25%25%
26%28%28%
30%30%30%
32%34%34%
39%40%
Corporate Tax
The Manufacturers' Association of Israel
INDUSTRIAL COMPANIES WITH EXPORT CAPABILITYINDUSTRIAL COMPANIES WITH EXPORT CAPABILITY2011-12: 15% - 10%
2013-14: 7% - 12.5%2015+: 6% - 12%
INDUSTRIAL COMPANIES WITH EXPORT CAPABILITYINDUSTRIAL COMPANIES WITH EXPORT CAPABILITY2011-12: 15% - 10%
2013-14: 7% - 12.5%2015+: 6% - 12%
2012Corporate Tax
33
Source: OECD. *Simple average of member countries.
Main Main
Challenges Towards 2013Challenges Towards 2013
The Manufacturers' Association of Israel
34
Main Challenges Towards 2013
35 The Manufacturers' Association of Israel
• A Global economy slowdown
• High Import Penetration
• A slowdown in Israeli Economy
• Increasing Costs Controlled by the Government
• Wage pressure
• Credit crunch in industry
• Government bureaucracy
• Uncertain fiscal policy
• Off-shoring
• Geopolitical instability
13.3%
-0.3%
3.7%
6.3%
10.8%
7.5%8.6%
7.1%
2.8%
-12.0%
14.1%
5.8%4.0%
5.6%
2012 Frcst
2013 Frcst
Volume of World TradeAnnual change, trade in goods
Source: The Economist, 17/4/12
Slowdown in World Trade
The Manufacturers' Association of Israel 36
Unbalanced Growth Around the World
The Manufacturers' Association of Israel 37
Developing Asia
Central and Eastern Europe
Latin America
United States
Euro Area Japan
7.8%
5.3%4.5%
1.7%1.5%
-0.7%
7.1%
1.9%
3.4%
2.0%
-0.3%
2.4%
7.5%
2.8%
4.2%
2.3%
0.7%1.5%
2012 Forecast 2013 Forecast
Growth ForecastAnnual GDP growth
Source: IMF World Economic Outlook update, July 2012.
Main Challenges Towards 2013
38 The Manufacturers' Association of Israel
• A Global economy slowdown
• High Import Penetration
• A slowdown in Israeli Economy
• Increasing Costs Controlled by the Government
• Wage pressure
• Credit crunch in industry
• Government bureaucracy
• Uncertain fiscal policy
• Off-shoring
• Geopolitical instability
Import Penetration
The Manufacturers' Association of Israel
44% 43%41%
34%32%
31% 30% 30%28%
26%24% 24% 24% 23% 23% 23% 23% 22% 22% 21%
14%
10%
ʺ ʸ ʩʣʧʠʥʡʩGoods and services import volume as a percentage of total final expenditure, constant prices
2011
Source: OECD
39
Main Challenges Towards 2013
• A Global economy slowdown
• High Import Penetration
• A slowdown in Israeli Economy
• Increasing Costs Controlled by the Government
• Wage pressure
• Credit crunch in industry
• Government bureaucracy
• Uncertain fiscal policy
• Off-shoring
• Geopolitical instability
40 The Manufacturers' Association of Israel
Slowdown in Israeli Economy
The Manufacturers' Association of Israel
41
GDP Business Sector GDP
4.8%
5.8%
4.8%5.3%
3.1% 3.1%
2.6% 2.6%
2012 Est. 2013 Frcst.
Economic Forecast 2013Real Annual Changes
Main Challenges Towards 2013
42 The Manufacturers' Association of Israel
• A Global economy slowdown
• High Import Penetration
• A slowdown in Israeli Economy
• Increasing Costs Controlled by the Government
• Wage pressure
• Credit crunch in industry
• Government bureaucracy
• Uncertain fiscal policy
• Off-shoring
• Geopolitical instability
environmental protection laws initiatives-> increased costs
World Energy Prices: upside risks (sanctions on Iran)
Increasing Costs Controlled by the Government
The Manufacturers' Association of Israel 43* Business Economics Department Projections for 2012/3.
Property Tax Water for industry Electricity Prices
5.6%
44.6%
37.2%
Increasing Costs Controlled by the GovernmentCumulative Change 2012/13 *
* Business Economics Department Projections for 2012/3.
Main Challenges Towards 2013
44 The Manufacturers' Association of Israel
• A Global economy slowdown
• High Import Penetration
• A slowdown in Israeli Economy
• Increasing Costs Controlled by the Government
• Wage pressure
• Credit crunch in industry
• Government bureaucracy
• Uncertain fiscal policy
• Off-shoring
• Geopolitical instability
• January 2011 3,850 NIS
• April 2011 (By law) 3,890 NIS
• July 2011 4,100 NIS (By law in
4/12)
• October 2012 4,300 NIS (By law in 4/13)
Contractor workers agreement (Differential minimum wage/ Equal conditions??)
An Additional Wage Updates are Expected
The Manufacturers' Association of Israel
due to the Minimum Wage Update
45
Difficulty in Recruiting Professional Employees for the Industry
According to preliminary findings of a survey of expectations in industry
The Manufacturers' Association of Israel 46
34%29% 30%
25%16%
9% 8%16% 18% 21% 23% 23% 20%
27% 29% 25% 23% 26% 26%
29%33% 27%
31%
16%
11%17%
27% 24%23%
27%33% 35% 30% 26% 32% 35% 28% 26%
20%
11% 18% 17%
18%
23%
36%
26% 25%
31%23%
25% 24%26% 27% 28%
20% 24% 26%
Q4/07Q1/08Q2/08Q3/08Q4/08Q1/09Q2/09Q3/09Q4/09Q1/10Q2/10Q3/10Q4/10Q1/11Q2/11Q3/11Q4/11Q1/12Q2/12
Little Difficulty Medium Difficulty Hard Difficulty
83%
73% 75% 73%
42%
61%
69%
77%
52%
66%
75% %
81% %82% 82%
84%
Difficulty in Recruiting Professional Employees for the Industry (Percent of Industrialists Reporting of Difficulties, Survey of Expectations in Industry)
78% 78%
Main Challenges Towards 2013
47 The Manufacturers' Association of Israel
• A Global economy slowdown
• High Import Penetration
• A slowdown in Israeli Economy
• Increasing Costs Controlled by the Government
• Wage pressure
• Credit crunch in industry
• Government bureaucracy
• Uncertain fiscal policy
• Off-shoring
• Geopolitical instability
55%52%54%
44%43%42%46%
38%
51%45%48%48%
50%
58%
71%67%
56%
48%48%46%48%
40%
48%51%51%51%53%
65%
Survey of expectations - credit difficulties
Difficulty in raising new credit Difficulty maintaining existing credit lines
Credit Crunch in Industry ??According to survey of expectations in industry
Source: Survey of expectations in Industry, July 2012, 176 respondents. 48 The Manufacturers' Association of Israel
Main Challenges Towards 2013
49 The Manufacturers' Association of Israel
• A Global economy slowdown
• High Import Penetration
• A slowdown in Israeli Economy
• Increasing Costs Controlled by the Government
• Wage pressure
• Credit crunch in industry
• Government bureaucracy
• Uncertain fiscal policy
• Off-shoring
• Geopolitical instability
0.3
1.0
1.0
1.9
1.9
3.1
3.5
4.6
5.6
5.8
6.5
6.5
9.6
11.5
13.9
23.2
0 5 10 15 20 25
Crime and theft
Insufficient capacity to innovate
Poor public health
Government instability/coups
Inflation
Foreign currency regulations
Poor work ethic in national labor force
Corruption
Policy instability
Tax regulations
Inadequate supply of infrastructure
Inadequately educated workforce
Restrictive labor regulations
Tax rates
Access to financing
Inefficient government bureaucracy
The most problematic factors for doing business
Israeli Government Bureaucracy:A Major Obstacle for Businesses
The Manufacturers' Association of Israel 50
Source: The Global Competitiveness Report of World Economic Forum (WEF), the 2012/13 report covers 144 economies.
Ease of Doing Business 2012
The Manufacturers' Association of Israel
Source: The World Bank. 2012 report covers 183 economies.
Singapore
Hong Kong
New Zealand
USA
Denmark
UK
Korea
Ireland
Finland
Canada
Japan
France
Austria
Israel
South Africa
Italy
12345
78
1011
1320
2932
3435
87
Ease of Doing Business Rank 2012
51
Main Challenges Towards 2013
52 The Manufacturers' Association of Israel
• A Global economy slowdown
• High Import Penetration
• A slowdown in Israeli Economy
• Increasing Costs Controlled by the Government
• Wage pressure
• Credit crunch in industry
• Government bureaucracy
• Uncertain fiscal policy
• Off-shoring
• Geopolitical instability
4.0%
3.4%3.0% 2.9%
1.6%
6.0%
5.5%
2.9% 3.0% 3.0%
3.6%
1.8%
1.0%
0%
2.2%
5.2%
3.7%3.3%
3.6% 3.5%
2012 Frcst.
2013 Frcst.
Target Deficit Actual Deficit
Government's Budgetary DeficitAs Percent of GDP
Government’s Budgetary Deficit
The Manufacturers' Association of Israel
53
1.5% 1.5%
As percent of GDP
Main Challenges Towards 2013
54 The Manufacturers' Association of Israel
• A Global economy slowdown
• High Import Penetration
• A slowdown in Israeli Economy
• Increasing Costs Controlled by the Government
• Wage pressure
• Credit crunch in industry
• Government bureaucracy
• Uncertain fiscal policy
• Off-shoring
• Geopolitical instability
19% 20%22% 23% 24%
26%29%
53%
Q4/09 Q1/10 Q2/10 Q3/10 Q4/10 Q1/11 Q3/11 Q4/11
Rate of companies with manufacturing activity abroad
In about two years , 53% of companies will have a manufacturing activity abroad.
Today, about 26% of companies have manufacturing activity abroad.
ʤʩʩ́ ʲ ʺ ʡʺ ʥʩɹʩʁʤy ʷʱ ʩɹʬʤʬʫʬʫr ʢʠʭʩhʩʩ́ ʲ ʺ ʤ̋ ʥʣʧ ʠʺ ʤ
Shifting Production Lines Abroad
The Manufacturers' Association of Israel
55Source: Survey of expectations in Industry, Economics division, MAI.
Main Challenges Towards 2013
56 The Manufacturers' Association of Israel
• A Global economy slowdown
• High Import Penetration
• A slowdown in Israeli Economy
• Increasing Costs Controlled by the Government
• Wage pressure
• Credit crunch in industry
• Government bureaucracy
• Uncertain fiscal policy
• Off-shoring
• Geopolitical instability
Geopolitical instability
The Manufacturers' Association of Israel
57