1
Strengths and Challenges
of the Israeli Economy
Prof. Zvi Eckstein
IDC Herzliya and Tel Aviv University
30 September 2013
Philadelphia Israel Chamber of Commerce
4
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
%
Crisis begins
Lehman Brothers collapse
Back to growth
1.2
2.5
4.9
-0.6
2.2
3.6*
Growth rates - Israel, US and Europe
0.9
3.0
3.4*
Euro area (17 countries)
US
Israel
Quarterly rates in annual terms. * excluding “TAMAR” gas, growth is 2.6 in 2013 and 2.7 in 2014.
Source: CBS and OECD data, forecasts by BOI (September 2013), Federal Reserve (September 2013) and IMF (July 2013).
5
7.47.2
6.66.3
6.9
7.4
12.112.312.3
4
5
6
7
8
9
10
11
12
13
4
5
6
7
8
9
10
11
12
13
Israel
Euro area
US
Unemployment signals that the real crisis remains in US and EU - less so in Israel
%
Source: OECD and BOI data, forecasts by BOI (September 2013), Federal Reserve (September 2013) and IMF (April 2013).
6
47
50
53
56
59
62
65
3
5
7
9
11
13
15
unemployment - left
employment - right
Is unemployment back to normal?Would employment keep rising?
Source: BOI.
7
Israel’s Economic Strength
• Financial markets
• Fiscal policy - Government budget
• Balance of payments
• Monetary policy and price stability
8
Financial Markets are functioning well, but…
• Private and public debt are reasonable, with no exceptional growth - except for corporate debt
• Banking capital level at world average (14.9%; core tier 1 8.7%): Banks are stable - but continuous decrease in ratio of credit to business sector product
• Savings rate relatively high (18.3%)
• No exposure to advanced financial instruments (MBS, CDO, CDS); small inter-banking market; No real estate bubble
• Capital requirements from banks, non-bank credit restrictions and lack of securitization - create limits on business credit
9
39.4 40.7 39.8
68.370.6 71.2
3.9 4.65*
3.0*
0
2
4
6
8
10
12
14
16
18
20
0
10
20
30
40
50
60
70
80
90
100
Public spending (% GDP) - left
Public debt (% GDP) - left
Deficit (% GDP) - right
Fiscal policy: Conservative and credible(?) (2015?)
Data for 2012 and forecasts are according to the new GDP definitions. Deficit for 2013 and 2014 is the target.
2012 according to the old GDP definitions: Debt 73, spending 42.1, deficit 4.2.
Source: BOI and CBS.
10
• Failure in managing 2012/13 budget due to increase in expenses beyond the target and decline in tax revenues (deficit target - 2%)
• 2013 budget increased by 7% in real terms compared to 2012, deficit target is - 4.65%.
• 2014 budget will rise by around 1.1% compared to 2013, deficit target is 3%. Few adjustments needed
• 2015 - need to adapt expenses and examine tax ratesto stay within the budget rules.
2013-2014 Budget
11
25
30
35
40
45
50
25
30
35
40
45
50
Balance of payments: Back to surplus% GDP
export
import
Total goods and services, calculated from current prices series.
Source: CBS.
12
-5.0 -4.9
-3.0
-0.8
-1.7 -1.7 -1.6-1.1
0.6
1.7
3.1
4.7
3.3
1.5
3.9
3.1
1.3
0.3
2.52.1 2.0
-6
-4
-2
0
2
4
6
Current account: Growing surplus, pressure on Shekel% GDP
Source: CBS, estimated forecast calculated from BOI (September 2013).
14
Monetary Policy Goals
• Main goal: Price stability, inflation target 1-3%
• Secondary goal: Support employment and growth (subject to price stability)
• Tools: Interest rate and FX market interventions
• Additional goal: Support financial stability
• Tools: Financial markets interventions and “macro-prudential” actions (e.g. restrictions on the expansion of the real estate market and restrictions on purchasing bonds and foreign currency derivatives)
15
-3
-1
1
3
5
7
9
Annual Inflation
1-year market-derivedinflationary expectations
10-year market-derived inflationary expectations
Inflation below mid-target
Source: CBS and BOI.
16
0
1
2
3
4
5
6
Interest rate policy: Expansionary in the west - how long? Slightly expansionary in Israel -
how long?
Recent changes:13.5.2013 BOI reduces the interest by 0.25 to 1.5%27.5.2013 BOI reduces the interest by 0.25 to 1.25%23.9.2013 BOI reduces the interest by 0.25 to 1%
Israel
EU
USUK
17
Shekel too strong? Intervention during unusual trends affecting market; Accumulating balances; In
the long-term - avoiding intervention
Source: BOI.
3
3.25
3.5
3.75
4
4.25
4.5
80
85
90
95
100
105
110
NIS/$ (right)
Nominal effective(left)
Daily $ 25M purchase
Daily $ 100M purchase
Purchase according to
market fluctuations
Intervention stopped
Interventions renewed
19
Output per worker Capital per workerR&D expenses as % from
branch output
1995-2000 2003-2007 1995-2000 2003-2007 1995-2000 2003-2007
by technology intensity:
Low Technology Industries
45 43 74 86 71 35
Medium-Low Technology Industries
55 57 135 161 62 139
Medium-High Technology Industries
60 74 114 119 38 59
High Technology Industries
78 83 116 137 85 105
Israeli vs. US industry - output, capital and R&D
(ratio between Israel and US, %)
Source: Applied Economics supported by OCS.
?
20
All industries
High Technology Industries
40,000
50,000
60,000
70,000
80,000
90,000
100,000
110,000
120,000
output per worker ($, 2005 PPP)
Israel US Europe small countries Europe large countries
70,000
90,000
110,000
130,000
150,000
170,000
190,000
210,000
230,000
capital per worker ($, 2005 PPP)
Israel US Europe small countries Europe large countries
50,000
60,000
70,000
80,000
90,000
100,000
110,000
120,000
output per worker ($, 2005 PPP)
Israel US Europe large countrties
80,000 100,000 120,000 140,000 160,000 180,000 200,000 220,000 240,000 260,000 280,000
capital per worker ($, 2005 PPP)
Israel US Europe small countries Europe small countries
Source: Applied Economics supported by OCS.
21
0
200
400
600
800
1000
1200
1400
1600
1800
2000
2200
0
200
400
600
800
1000
1200
1400
1600
1800
2000
2200
High Technology Industries
Medium-Low Technology Industries
Medium-High Technology Industries
Low Technology Industries
Source: CBS.
$ monthly millions
Exports by technology intensity: “The growth engine is stuck”
22Source: CBS.
Export by technology intensity: Transition to High-Tech exports
High
Technology
37%
Medium-
High
Technology
28%
Medium-
Low
Technology
21%
Low
Technology
15%
1995
High
Technology
45%
Medium-
High
Technology
35%
Medium-
Low
Technology
14%
Low
Technology
7%
2012
23
Export destinations (ex. Diamonds): Transition to Asia
European
Union 32%
Asia 16%
USA 30%
Rest 21%
2000
Source: CBS.
European
Union 31%
Asia 21%
USA 23%
Rest 24%
2012
24
Challenges
• Employment, poverty and inequality
• Invest in productive human capital
• Encourage employment
• Education and human capital - employment skills
• Peace and the economy