3rd quarter of 2017

The Israeli economy:Trends and Outlook

Outline

• Factsheet

• Recent economic trends

• Fiscal indicators

• Economic Outlook

Israel Factsheet

Sources: Israeli CBS, BoI

External AccountLabor Market

Economy Population

Israel Factsheet

Sources: Israeli CBS, BoI

Economy (2016)

317.7GDP, current Billion USD

1,220GDP, current Billion NIS

37,198GDP per capita, current USD

3.3Real GDP growth (latest 5 year average, %)

3.1Average real yearly growth forecast (2017-

2018, %)

External AccountLabor Market

Population

Israel Factsheet

Population (2016)

8.5Total population (Millions)

44Main working ages (%)

7Ultra-Orthodox Jews (ages 25-64, %)

18Arab Minority (ages 25-64, %)

75Jews (excl. Ultra-Orthodox) and others (ages

25-64, %)

1.9Population growth (latest 5 year average, %)

Sources: Israeli CBS, BoI

Economy (2016)

317.7GDP, current Billion USD

1,220GDP, current Billion NIS

37,198GDP per capita, current USD

3.3Real GDP growth (latest 5 year average, %)

3.1Average real yearly growth forecast (2017-

2018, %)

External AccountLabor Market

Israel Factsheet

Population (2016)

8.5Total population (Millions)

44Main working ages (%)

7Ultra-Orthodox Jews (ages 25-64, %)

18Arab Minority (ages 25-64, %)

75Jews (excl. Ultra-Orthodox) and others (ages

25-64, %)

1.9Population growth (latest 5 year average, %)

Sources: Israeli CBS, BoI

Economy (2016)

317.7GDP, current Billion USD

1,220GDP, current Billion NIS

37,198GDP per capita, current USD

3.3Real GDP growth (latest 5 year average, %)

3.1Average real yearly growth forecast (2017-

2018, %)

Labor Market (2016)

64.1Participation rate (ages 15+, %)

79.9Participation rate (ages 25-64, %)

4.8Unemployment rate (ages 15+, %)

4.1Unemployment rate (ages 25-64, %)

26.7Part-time workers (ages 15+, %)

External Account

Israel Factsheet

Population (2016)

8.5Total population (Millions)

44Main working ages (%)

7Ultra-Orthodox Jews (ages 25-64, %)

18Arab Minority (ages 25-64, %)

75Jews (excl. Ultra-Orthodox) and others (ages

25-64, %)

1.9Population growth (latest 5 year average, %)

Sources: Israeli CBS, BoI

Economy (2016)

317.7GDP, current Billion USD

1,220GDP, current Billion NIS

37,198GDP per capita, current USD

3.3Real GDP growth (latest 5 year average, %)

3.1Average real yearly growth forecast (2017-

2018, %)

External Account (2016)

3.84Exchange rate (NIS per USD)

29.8Exports of goods and services (% of GDP)

27.5Imports of goods and services (% of GDP)

Labor Market (2016)

64.1Participation rate (ages 15+, %)

79.9Participation rate (ages 25-64, %)

4.8Unemployment rate (ages 15+, %)

4.1Unemployment rate (ages 25-64, %)

26.7Part-time workers (ages 15+, %)

8Source: CBS

Israel Factsheet

4.4 3.9

3.3

2.5 2.4 2.1

1.3 1.4 1.5 1.5 0.9 0.8

8.1

2.0

3.6

5.8

3.9

1.8

2.7 2.6

1.7

4.3 4.1

1.6

2.4

0

2

4

6

8

10 Exports of Goods

Imports of Goods

18.1

Main trading partners, 2016Trade volume in billion current US$

Israel Factsheet

Source: OECD

49.9%

35%

0%10%20%30%40%50%60% Population with higher education 25-64

% of total, 2016 or latest available data

4.3%

2.4%

0%

1%

2%

3%

4%

5%Gross domestic spending on R&D (2015)

% of GDP

Recent economic trendsLocal growth rates have moderated, reflected in GDP

Mixed trends in exports

Labor market reflects full employment

Zero bound policy leads to asset prices appreciation

Forecasts are continuously revised downwards. Assumption for

expansion of world trade includes large safety margin

2.4

2.9

1.5

2.2

0.6

0.5

1.50.6

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2014 2015 2016 2017

3.8

2.8 2.4

4.2

1.9

2.63.1

0.5

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2014 2015 2016 2017

Source: IMF- October 2017 WEO 11

World TradeGrowth rates ,%

US GDPGrowth rates ,%

Gap between current and two years

prior forecast

Actual data/updated forecast

0.9%

2.5%

4.1%

-1%

1%

3%

5%

7%

9%

11%

13%

Correction due to large scale car purchases

in Q4

Israel has enjoyed continued growth for the last 15 years

Source: CBS

The Second

Intifada

Global

Economic

Crisis

12

Consumption has led the economic growth in recent years and is expected to contribute to growth in the medium term.

13

* According to the forecast of the chief economist

Source: CBS. The Chief Economist Dept. calculations.

55%

23% 20%

2%

In 2017*, the GDP was 1,257 billion NIS

4.0%4.3%

3.4%

1.0%

2.9%

3.2%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

GDP Components: Average growth rate

for the years 2012-2017*

Public

Consumption Investments

Private

Consumption

Net Exports

The output gap is close to zero

14

Israel OECDUnited

States-14%-12%-10%-8%-6%-4%-2%0%2%4%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: Upper chart – OECD, bottom chart - Chief Economist Dept. calculations

2016

Israel

Exports of services exhibit strength while exports of goods remain weak

15* January –September

Source: CBS, CPB .

Exports of goods

and services

(Billions ILS)

World trade

Index (CPB)

0

10

20

30

40

50

60

70

80

90

0

20

40

60

80

100

120

140

World trade (RHS)

Exports of goods

(LHS)

Exports of services

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

40

90

140

190

240

290

340

390 Employees in the high-tech sector

Future growth of services exports depends on further expansion of

employment in the high-tech sector

16

*2017- January - August

Source: CBS.

High-tech employees,

as % of business sector

employment (RHS)

High-tech employees

(LHS)

**Q1 –Q3 in annual terms

Source: IVC.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0VC investments in Israel

Billions $US

Local VC Foreign VC

Thousands

The high-tech sector, gas production and the decline in energy prices

have contributed to the surplus in the current account

17

* 2017 - First half at annual rate

Source: CBS.

-4.8%-4.6%

-2.8%

-0.7%-1.4%-1.4%-1.5%

-1.0%

0.7%

1.9%

3.4%

4.7%

3.3%

1.4%

3.9%3.5%

2.5%

0.6%

3.4%3.9%

5.2%

3.8%

2.8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

-6

-4

-2

0

2

4

6

8

10

12

14Current Account Balance

In billions of $US and as percentage of GDPBillions of $US (LHS)

% of GDP (RHS)

Demographic change creates challenge for future growth and productivity

Source: CBS, adjusted to immigration statistics.

1.8%

1.4%

0.4%

3.0%

4.0%

Total SecularJewish

population

Arabminority

Ultra-Orthodox

Jews

Totalpopulation

Work Force

Population % change2015-2019

Participation RateMain labor ages, 2016

80.7%

64%57.6%

Total Population Ultra-Ortodox Jews Arab minority

Labor market indicators reflect full employment

19

* January – September average

Source: CBS.

4.2%

64.0%

57%

59%

61%

63%

65%

4%

6%

8%

10%

12%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017*

Participation Rate and Unemployment Rate in IsraelAge 15 and older

Participation Rate

(RHS)

Unemployment Rate

(LHS)

20

Wages increased significantly since 2014, faster than labor productivity

0.9%1.1%

2.9%

2.8%

2.8%

8,200

8,400

8,600

8,800

9,000

9,200

9,400

9,600

9,800

Monthly data

Annual average

The increase in wages reflects a high

level of employment, compensation for

previous years and implementation of

policy measures (min. wage etc.)

Source: CBS. Minimum wage impact was calculated

by the Chief Economist Dept.

2017 growth rate is seasonally adjusted and refer to January - August.

Wage growth

between 2008-2011

was lower than the

growth in labor

productivity

2018201720162015

5.56.13.86.1% change in minimum wage

1.11.20.81.2% contribution to average wage

Wages, fixed prices (2011)

10%

17%

11% 11%

9%

11%

8%

10% 10% 10%

11%

8%

13%

21%

0%

5%

10%

15%

20%

25%

-10

0

10

20

30

40

50

60

70

80

Hotel andrestaurantservices

Managementservices

Agriculture Education Wholesaleand retail

Health,social

services

Construction Transportand postalservices

Real estate Technicalservices

Industry Government Financialservices

IT

0-6,000 6,000-9,000 9,000-14,000 14,000-18,000

Change in the amount of jobs

Percent of wage growth

Fast pace of wage increases was recorded in sectors with

low paying jobs, and also in the hi-tech sector

Wages in the hi-tech sector reflect supply constraint

The wage increases in the low-paying sectors were led by both strength of the labor market and an increase in minimum wages

2017* vs. 2013

21

* 2017 data based on January – August AverageSource: CBS.

The inflation environment remains low and the accommodative monetary policy persists with zero bound interest rates, similarly to many OECD countries

22

-2%

0%

2%

4%

6%

8%

10%

12%

14%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Real Interest Rate Nominal Interest Rate Inflation Expectaions

*

*2017: January-Oectober

Source: Bank of Israel

Zero bound interest rate environment contributes

to appreciation of asset prices

23

• 2017 – January - November (except Real interest – September and Apartments - August)

• Source: CBS, TASE, Chief Economist Department calculations

-5%

0%

5%

10%

60

80

100

120

140

160

180

200

220

240

260Asset prices and real interest rate

For Asset Prices - Jan 2009 = 100

*

TA 125

Apartments

Sovereign

Bonds

Real interest

(RHS)

The low interest rate environment has not reversed public and business

sectors deleveraging, while household debt grows moderately

24Source: BOI, CBS.

150%

160%

170%

180%

190%

200%

210%

220%

230%Total credit

as % of GDP

0%

20%

40%

60%

80%

100%

120% Credit compositionas % of GDP

business sectorhouseholdshousing loansgovernment and municipal authorities

Fiscal IndicatorsStabilization in government expenditure

Continued decline in Debt/GDP ratio

Deficits are still relatively high

Reforms reduced the size of the public sector. Since 2009 the share of

interest payments and defense expenditure in GDP terms have leveled

26Source: CBS, Chief Economist Dept. calculations.

36% 36% 36% 35% 34% 33%35% 35% 35% 32% 31% 31% 31% 31% 31% 30% 30% 31% 31% 31% 31% 31%

6% 6% 6% 6% 5%5%

5% 4% 5%5%

5% 4% 4% 3% 3% 3% 3% 3% 3% 3% 3% 3%

9% 9% 8% 8%8%

8%8% 9% 8%

8%8% 8%

7% 7% 6%6% 6% 6% 6% 6% 6% 6%

50% 50% 50%49%

47%45%

48% 49% 48%

45%44% 43%

42% 41% 41%40% 39% 40% 40% 40% 39% 39%

10%

20%

30%

40%

50%

60%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

General Government Expenditure as % of GDP

Civilian expenditure Interest payments Military expenditure

Government expenditure of GDP in Israel is compatible with OECD countries while civil government expenditure is relatively low

Source: OECD

Composition of Government expenditure (2015) as % of GDP

* 2014, Latest available data

57% 55% 55% 54% 52% 50% 50% 49%45% 44% 44% 43% 43% 42% 40% 39% 37% 37%

34%32%

0%

10%

20%

30%

40%

50%

60%

0%

10%

20%

30%

40%

50%

60%

Social Welfare Education Defense Health other government expenditure

11%

6%

7%

5%

11%

The downward trend of the government debt to GDP ratio continues

28Source: MoF, CBS, The Chief Economist Dept. calculations.

97.9%

95.9%93.9%

95.6%

89.6%

79.5%

83.7%

90.2%

92.9%91.3%

88.2%

80.2%

73.1%72.2%

74.8%

71.0%

69.0%68.4%67.0%

66.0%

63.8%62.4%

60%

65%

70%

75%

80%

85%

90%

95%

100%

105%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Public Debt

as % of GDP

Global

Economic

Crisis

Economic OutlookContinued growth, close to potential

Growth of wages and employment, low inflation and cheap credit

support consumption

Slow and fragile recovery

Structural changes in developed countries

Cyclical changes in developed countries

Structural changes in developing countries

Cyclical changes in developing countries

Slowdown inproductivity

Leveragein private sector

Increase of public debt

Decline in investments

Change in the Chinesegrowth model

Decline of commodity pricesPolicy change in U.S.

Structural and cyclical changes shape the world economy

Decline in FX reserves

Geopolitical instability

The slowdown in the growth environment reflects structural changes

32

DemographyFiscal NeedsDevelopment of the high-tech Sector

Higher standards of

living

Declining growth

rate of the labor

force and

increased

participation of

low skilled

workers in the

labor market have

negative effect on

productivity

Increase in social

and security

challenges led to

stability in the

share of public

spending

(compared with

declining trend)

The high-tech

sector grew

rapidly until

2010. Continued

growth is

contingent upon

supply of skilled

labor.

The transition to a

developed

economy requires

more emphasis on

increased

productivity

Potential growth is close to 3% in the short-medium term

Total government income burden (tax, fees and other revenues)

is expected to remain stable

*Forecast

Government Income Burden(as % of GDP)

27.0 26.6 25.7 24.9 25.0 25.3 26.0 26.023.7

21.8 22.4 22.6 22.0 22.7 23.1 23.1 23.424.8

23.6 23.6 23.7 23.7

4.02.9 5.1

4.6 4.55.1

5.0 4.4

4.3

3.43.2 2.9

2.82.7 2.6 2.7

3.32.2

2.3 2.2 2.0 2.0

31.0

29.5

30.8

29.5 29.530.4

31.030.4

28.0

25.2 25.6 25.524.8

25.4 25.6 25.826.7 27.0

25.9 25.8 25.7 25.7

15

17

19

21

23

25

27

29

31

33

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017* 2018* 2019* 2020* 2021*

Learn More

34

Visit the Israel Ministry of Finance website for

more information:

Economic Overview of Israel

Other publications and reports on the Israeli economy

Ministry of Finance publications and reports

About the Ministry

Ministry press releases

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