Dr.KarnitFlugGovernoroftheBankofIsrael30.06.2017

1

TheIsraeliEconomy:CurrentTrends,StrengthandChallenges

GDPpercapitaGrowthRates

GDPpercapitaannual%change(2000-2018F)

2 Source:IMF

Israel

DevelopingEconomies

AdvancedEconomies

*Simpleaveragefor21richOECDcountriesandemergingmarketsaccordingtoIMFdeOinition

-6

-4

-2

0

2

4

6

8

Spain

$34,054 $34.861

$40.695

$56.084

$-

$10.000

$20.000

$30.000

$40.000

$50.000

$60.000

$70.000

3

GDPperCapita,InternationalComparison

GDPperCapita(CurrentUS$,PPPadjusted)selectedOECDcountries,2015

Source:IMF

Source:BolandIMF

4

*Excl.diamondsandstart-ups

Index2008=100

IsraeliExports

Israel’sGoodsandServicesExportsandWorldTrade,1995-2018F

Forecast

25

35

45

55

65

75

85

95

105

115

125

135

145

5

StructuralChangeintheCompositionofGrowth–PrivateConsumptionisLeadingWhileExportshaveamodestcontribution

-4

-2

0

2

4

6

8

10

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

% Public consumption Private consumption Exports (excl. diamonds ) Investment Total increase in uses

The increase in uses: The total increase and the contribution of uses

2007-2016

3.764

66

68

70

72

74

76

78

80

82

3,5

4,5

5,5

6,5

7,5

8,5

9,5

10,5

11,5

12,5 80.0

6

ParticipationRate

Employmentrate

Unemploymentrate

LaborMarketQuarterly,1995-2017,25-64

% %

Source:CentralBureauofStatisticsLaborForceSurvey

*Thedatafor2016-Q4iscalculatedbytheaverageofOctoberandNovember

77.0

Unemploymentrate,25-64,2016

4,8

19,6

0

5

10

15

20

25

Iceland

Japan

Switzerland

Ko

rea

CzechRe

public

Germ

any

Mexico

Norway

Israel

UnitedStates

Hungary

UnitedKingdo

m

New

Zealand

Au

stralia

Nethe

rland

sAu

stria

Po

land

De

nmark

Luxembo

urg

Chile

Estonia

Swed

en

Canada

OEC

DSloven

ia

Ireland

Be

lgium

Finland

Latvia

SlovakRep

ublic

Latvia

France

Turkey

Portugal

Spain

Greece

%

Source:OECDandBoI7

RealWageperEmployeePost*1995-2017

NIS

*Seasonallyadjusted,12monthsmovingaverage,2015prices

Source:CentralBureauofStatisticsData8

Last12-monthpercentchange

BusinessSector Total

PublicSector 2.0%

2.7%

3.3%

7.500

8.000

8.500

9.000

9.500

10.000

50

70

90

110

130

150

170

190

Q1-20

07

Q3-20

07

Q1-20

08

Q3-20

08

Q1-20

09

Q3-20

09

Q1-20

10

Q3-20

10

Q1-20

11

Q3-20

11

Q1-20

12

Q3-20

12

Q1-20

13

Q3-20

13

Q1-20

14

Q3-20

14

Q1-20

15

Q3-20

15

Q1-20

16

Israel

Canada

Australia

Germany

UnitedKingdom

Japan

France

UnitedStates

Ireland

Spain

RealHousingPricesIndexQ1-2007=100

9SOURCE:OECD

HousingPricessincetheGFC2007-2016

0

20

40

60

80

100

120

140

160

180

Source: BoI & CBS 10

HousingPrices–theLongRun1973-2016 index,2000=100

Bank of Israel Policy

-4

-2

0

2

4

6

8

*ForwardinOlationexpectations3-5years

%

InXlation12month

ExpectationsForward*

ActualInOlationandInOlationExpectations2006-2017

12 Source:Bol

ExchangeRates2012-2017

NIS Index

NominalEffective

13 Source:BoI

70

75

80

85

90

95

100

105

110

3,2

3,4

3,6

3,8

4,0

4,2

4,4

4,6

4,8

5,0

5,2

01/1

2 03

/12

05/1

2 07

/12

09/1

2 11

/12

01/1

3 03

/13

05/1

3 07

/13

09/1

3 11

/13

01/1

4 03

/14

05/1

4 07

/14

09/1

4 11

/14

01/1

5 03

/15

05/1

5 07

/15

09/1

5 11

/15

01/1

6 03

/16

05/1

6 07

/16

09/1

6 11

/16

01/1

7 03

/17

05/1

7

₪/€ Left axis

₪/$ Left axis

0,1 0 1 2 3 4 5

01/07

06/07

11/07

04/08

09/08

02/09

07/09

12/09

05/10

10/10

03/11

08/11

01/12

06/12

11/12

04/13

09/13

02/14

07/14

12/14

05/15

10/15

03/16

08/16

01/17

06/17

0 500

1.000 1.500 2.000 2.500 3.000

01/07

06/07

11/07

04/08

09/08

02/09

07/09

12/09

05/10

10/10

03/11

08/11

01/12

06/12

11/12

04/13

09/13

02/14

07/14

12/14

05/15

10/15

03/16

08/16

01/17 BankofIsraelPolicyTools2007-2017

FXIntervention

(US$)

InterestRate(%)

01/00 05/27 10/54 02/82 07/09 11/36

01/07

06/07

11/07

04/08

09/08

02/09

07/09

12/09

05/10

10/10

03/11

08/11

01/12

06/12

11/12

04/13

09/13

02/14

07/14

12/14

05/15

10/15

03/16

AdditionalprovisionforhighLTVloans

HighercapitalrequirementsforhighLTV

VariableInterestRatelimit

LTVlimit

PTIlimitand

capitalrequirement

Highercapital

requirementsforhighLTV

BondPurchases

18BillionNIS

Highercapital

requirements

Macroprudentia

lMeasures

14

NaturalGasPurchaseprogram+Intervention

Buildingreserves Intervention

“TheMonetaryCommitteeassessesthatmonetarypolicywillremainaccommodativeaslongasneededfortheinXlation

returntoit’starget”

Source:Bol

TheStrengthsBehindIsrael’sHighTechSector

IsraelisLeadinginInternationalInnovationRankings

Source:WorldEconomicForum2016-2017 & BloombergInnovationReport201716

FactorsinIsraelthatencourageinnovationü  Qualityuniversitiesthatprovidetheeconomywithhumancapital,scientiOicaptitude,andtechnologicalabilities

ü  Collaborationbetweentheuniversitiesandindustryü  GovernmentsupportforcommercialR&Dü  Developedventurecapitalindustry

Ranking 210

Index

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Israel

UnitedStates

Canada

SouthAfrica

Korea

Finland

Switzerland

Sw

eden

Ire

land

UnitedKingdo

m

Austria

Po

rtugal

France

Denm

ark

Germ

any

New

Zealand

Japan

Nethe

rland

sAu

stralia

Hungary

Estonia

Norway

Belgium

Spain

SlovakRep

ublic

Luxembo

urg

Poland

Ru

ssianFede

raao

nSloven

ia

Italy

Seed/start-up/early stage Later stage venture

VentureCapitalInvestmentas%ofGDP,2015

Source:OECD 17

0

10

20

30

40

50

60

ShareofthePopulationAged25-64withTertiary-LevelEducation,2015

%

Source:OECDEducationataGlance201518

Israel’sInnovationMap

Source:StartupNationCentral19

144אלקטרוניק

ה

4,983Start-Ups

279Cleantech

177

Pharmaceuticals255

Agro&FoodTech

746

DigitalHealth&MedicalTechnologies

433

Security&SafetyTech

430

SoftwareApplications

300Mobile&TelecomTech

413Fintech&eCommerce

20

0

1

2

3

4

5

6

7

8

9

Employees aged +15 in the high-tech field, Percentage of total , 2014 %

Source: CBS and EuroStat

Employees In High-Tech, International Comparison

Yet, There are Challenges Ahead

20,00

25,00

30,00

35,00

40,00

45,00

50,00

55,00

60,00

65,00

70,00

Israel

USA$

Source:TheConferenceBoardTotalEconomyDatabase2016

OutputPerHourWorked1995-2016,$PPP,2015ConstantPrices

22

21RichCountries

265

270

275

280

285

290

295

300

TheProductivityGapOccursduetoSeveralReasons

0

100.000

200.000

300.000

400.000

500.000

600.000

Mex

ico

Pol

and

Chi

le

Turk

ey

New

Zea

land

Is

rael

S

lova

kia

Est

onia

H

unga

ry

Japa

n C

anad

a Ic

elan

d A

ustra

lia

Cze

ch R

epub

lic

OE

CD

S

love

nia

Uni

ted

Sta

tes

Ger

man

y S

wed

en

Sw

itzer

land

U

nite

d K

ingd

om

Latv

ia

Den

mar

k Fi

nlan

d N

ethe

rland

s A

ustri

a Lu

xem

bour

g Fr

ance

P

ortu

gal

Bel

gium

N

orw

ay

Spa

in

Gre

ece

Irela

nd

Italy

Capitalperworkerinthebusinesssector

2014,in2011prices,$PPP

$

Source:BoI, RAMA, DoingBusiness

677277828792

New

Zealand

Denm

ark

Korea

Norway

UnitedKingdo

m

UnitedStates

Swed

en

Estonia

Finland

Latvia

Australia

Germ

any

Ireland

Austria

Iceland

Canada

Poland

Portugal

CzechRe

public

Nethe

rland

s

France

Sloven

ia

Switzerland

Spain

SlovakRep

ublic

Japan

Hungary

Belgium

Mexico

Italy

Israel

Chile

Luxembo

urg

Greece

Turkey

Problems-solvingindigitalenvironmentskillsaccordingtoPIAAC

survey Aged15+,2015

23

Israel’sscore

Totalscore(0-100)in2017DoingBusinessindex

495

391

507

391

488

401

300

400

500

600

דוברי עברית

דוברי ערבית

דוברי עברית

דוברי ערבית

דוברי עברית

דוברי ערבית

Performance differences between Hebrew & Arabic students in PISA- mathematics,

2015

470 479 467

490 493 493

300350400450500550

Mathematics Reading Science

IndicatorsforQualityandGapsinHumanCapital

39

Scoreamong70countries

OECD

Israel’sstudentsperformanceinreading,mathematics&science,PISA2015

37 40

Source:OECD,RAMA24

29%

16%

0%

20%

40%

60%

Finland

Korea

Spain

Canada

Portugal

UnitedKingdo

m

Latvia

Sloven

ia

Poland

Ge

rmany

Australia

UnitedStats

Nethe

rland

sNew

-Zealand

Ire

land

OEC

DSw

itzerland

De

nmark

Belgium

France

Italy

Norway

Austria

Ru

ssia

CezchRe

public

Swde

nLituania

Turkey

Luxembu

rg

Hungary

Greece

SlovakRep

ublic

Iceland

Israel

Chile

Mexico

Thelikelihoodofstudentsinthebottomquarterofsocio-economicdistributionscoringinthetopquarterof

thescienceperformancedistribution,2015

110

160

210

260

310

360

Israel

Korea

Belgium

SlovakRep

ublic

Switzerland

Po

rtugal

Ausria

France

Hungary

Australia

Italy

Iceland

Luxembu

rg

New

Zealand

United

CezchRe

public

Nethe

rland

sSw

eden

OEC

DGe

rmany

Greece

Japan

UnitedStates

Canada

Sloven

ia

Poland

Lituania

Spain

Chile

Norway

Finland

Turkey

Estonia

Denm

ark

Ireland

Latvia

Mexico

PerformancedifferencesbetweenstudentsinPISA-mathematics,2015

ScienceReadingMathematics

HebrewSpeaking

HebrewSpeaking

ArabicSpeaking

ArabicSpeakingHebrew

SpeakingArabicSpeaking

Source:BasedonCentralBureauofStatisticsDataandOECD25

EconomicIncomeInequalityishigh

*Israeldatafor2014

GiniIndex,2014,atdisposableincome,posttaxesandtransfersIsrael2015

0

0,1

0,2

0,3

0,4

0,5

0,6

Iceland

Norway

Denm

ark

Sloven

ia

Finland

CezchRe

public

Belgium

SlovakRep

ublic

Austria

Luxembu

rg

Swed

en

Nethe

land

sHu

ngary

Germ

any

France

Switzerland

Po

land

Ko

rea

Ireland

OEC

DCanada

Italy

Japan

New

Zealand

Au

stralia

Portugal

Greece

Spain

Latvia

Unitred

Kingdom

Estonia

Israel

Turkey

UnitedStates

Mexico

Chile

Israel & Spain

Trade Relations – Israel & Spain Exports & Imports of goods, 2016

ImportsfromSpain$1,577.3Million

ExportstoSpain$896.1Million

Source: CBS 27

33%Chemicals

4%MedicalInstruments

9%PlasticProducts

25%MotorVehiclesandTransportEquipment

15%ElectricalEquipmentandMachinery

7%BaseMetals

10%Chemicals

16%Others

31%ElectricalEquipmentandMachinery

6%VegetableProducts

17%Others

16%TexalesandTexaleAracles

5%PlasticProducts

6%ArticlesofStones

Trade Relations – Israel & Spain Exports & Imports of Business Services, 2015

ImportsfromSpain$53Million

ExportstoSpain$42Million

Source: CBS 28

37%Advertising,MarketResearch,andPublicOpinionPolling

3%,Computerservices

5%Telecommunications

8%Food6%Adverasing

5%R&D

50%Others

6%Accounting

32%Research&Development

18%ServicesbetweenRelatedEnterprises

31%Chargesfortheuseofintellectualproperty

5%Computerservices

8%Others

29

ToSumUp

TheIsraeliEconomyhasagreatpotential,butwhilepartofthe

economyutilizesitsstrengthsandresources,inclusivegrowth

of the economy as a whole requires a comprehensive and

persistentpolicy.

The main pillars of such policy should address economic

inequality,inefOicientregulationandtheneedtoincreaseboth

investmentandhumancapital.

¡Gracias!