GLOBAL ECONOMY AND IMPLICATIONS FOR ISRAEL
Aaron Institute for Economic Policy Annual Conference
May 4, 2017
Craig Beaumont, European Department, IMF
Outline
World economic outlook (WEO)
1
Broader trends in
global economy
Policy priorities for Israel
Change in bond yields since August 2016 (percentage points)
Source: IMF staff calculations.
Market sentiment has improved since mid-2016
2
Equity price changes since August 2016(percent)
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
Jap
an
Un
ited
Kin
gdo
m
Un
ited
Sta
tes
Ger
man
y
Fran
ce
Spai
n
Ital
y
Bra
zil
Ru
ssia
Ind
ia
Ch
ina
Sou
th A
fric
a
Mex
ico
Turk
ey-10
-5
0
5
10
15
20
25
30
Jap
an
Un
ited
Kin
gdo
m
Un
ited
Sta
tes
Ger
man
y
Fran
ce
Spai
n
Ital
y
Bra
zil
Ru
ssia
Ind
ia
Ch
ina
Sou
th A
fric
a
Mex
ico
Turk
ey
Manufacturing PMI(three-month moving average; deviations from 50)
Sources: Haver Analytics; and IMF staff estimates.
Along with business and consumer confidence
3
Consumer Confidence(index; 2010 = 100)
-3
-2
-1
0
1
2
3
4
5
6
2012 13 14 15 16
Advanced economiesEmerging market economies
Feb.
17
90
95
100
105
110
115
120
2012 13 14 15 16
Advanced economiesEmerging market economiesWorld
Feb.
17
World Trade and Industrial Production(three-month moving average; annualized percent change, unless noted otherwise)
Sources: Haver Analytics; and IMF staff estimates.
As global activity has begun picking up steam
4
-6
-4
-2
0
2
4
6
8
10
2011 12 13 14 15 16
Industrial production World trade volumes
Feb.
17
5Source: IMF staff calculations.
Trade growth reflects improved investment
-3
-2
-1
0
1
2
3
4
5
6
-4 -2 0 2 4 6 8Fixed investment growth
Imp
ort
gro
wth
Advanced Economies(percent; 2016)
-30
-25
-20
-15
-10
-5
0
5
10
15
20
25
-30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30Fixed investment growth
Imp
ort
gro
wth
Emerging Market and Developing Economies(percent; 2016)
Forces shaping the outlook
Advanced economies
• Cyclical rebound & monetary stimulus
• Post-crisis repair varies
• Expansionary U.S. fiscal policy
• Demographic headwinds
Emerging market and developing economies
• Rebalancing in China
• Adjustment to lower commodity prices
• Geopolitical and political factors
• Demographic trends
6
• Weak productivity growth
Ongoing forces…
…overlaid on…
Source: IMF staff calculations.
World growth rises to 3.8% by 2022, from 3.1% in 2016,
led by Emerging and Developing Economies
7
World GDP Growth(percent)
0
1
2
3
4
5
6
7
1995-2004 2005-2015 2016 2022
World Advanced economies EMDEs
Advanced Economies
Cyclical recovery in near term,
subdued growth in medium term, at
1.7% in 2022.
Emerging Market and Developing
Economies
Stressed economies bottoming out,
commodity importers generally
projected to maintain high growth,
overall growth of 5% by 2022.
Advanced Economies(three-month moving average; annualized percent change)
Source: IMF staff calculations.
Core inflation little changed even as headline inflation up recently
8
Euro Area Headline CPI Inflation(percent)
-2
-1
0
1
2
3
2012 13 14 15 16
HeadlineCPI
Core CPI
Feb.
17
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2000 2004 2008 2012 2016 2020
Euro area
Germany
Italy
Source: World Economic Outlook, April 2017.
2022
Euro Area inflation reaches 2% gradually, led by Germany
But global growth risks skewed to downside
• Protectionism. Inward-looking policies could hurt demand and productivity.
• U.S. macroeconomic policy mix. Faster-than expected U.S. interest hikes and dollar appreciation could temper U.S. growth and stress vulnerable economies.
• Financial threats to EMs. Some EM countries are exposed to sudden shifts in investor confidence. In China, continued reliance on credit and slow restructuring mean that the risk of an eventual disruptive adjustment is growing.
• Sharp rollback of financial regulation. Higher risk of costly financial crises.
• Weak demand and balance sheets. In parts of Europe, adverse feedback among low demand, low inflation, weak balance sheets, and anemic productivity growth.
• Non-economic shocks. Geopolitical tensions, political discord, extreme weather events, and terrorism and security concerns. 9
-0.6
-0.4
-0.2
0.0
0.2
0.4
2017 2019 2021 2023 2025
Less productive fiscal stimulus
Highly productive fiscal stimulus
Advanced Economies Real GDP(percent deviation from case with no change in U.S. fiscal policy)
Source: IMF staff calculations.
Impact of U.S. Fiscal Stimulus on Other Economies: Depends on Supply-Side Effects and thus Interest Rate Reaction
10
Emerging Markets Real GDP(percent deviation from case with no change in U.S. fiscal policy)
-0.6
-0.4
-0.2
0.0
0.2
0.4
2017 2019 2021 2023 2025
Less productive fiscal stimulus
Highly productive fiscal stimulus
Illustrative fiscal stimulus of 1% of GDP in 2018, and 2% of GDP in 2019-2021
Implications of Global Outlook for Israel?
• Export growth stronger: about 4% in 2017-19, from almost flat in 2014-16
• Real GDP growth solid: about 3% in 2017-19
– Employment growth about 2.5%, so unemployment remains below 5%
– But productivity growth low, about 0.5%
• Inflation rises: low unemployment aids wage growth, higher global inflation
• Interest rates rise in time: yet low global interest rates may limit increase
• Housing prices: recent stability welcome, but potential for renewed upward pressures if interest rates remain low and supply gains are not lasting
11
Some Broader Trends in the Global Economy
• Slowing international trade
World Economic Outlook, Oct. 2016, Chapter 2
• Declining productivity growth “Gone with the Headwinds: Global Productivity Growth”, IMF Staff
Discussion Note, SDN/17/04, April 2017
• Low interest rates
Global Financial Stability Report, April 2017, Chapter 2
• Falling labor share of income World Economic Outlook, April 2017, Chapter 3 12
Total Factor Productivity Growth, 2000–22(PPP GDP-weighted; dashed lines indicate period average)
Source: IMF staff estimates.
Productivity Growth Has Slowed Around the World
13
-2
-1
0
1
2
3
4
5
2000 2004 2008 2012 2016 2020
Advanced economies
Emerging market anddeveloping economies
1.3%
0.3%
2.8%
1.0%
1.9%
0.7%
Partly a crisis legacy, as investment hit by:
• weak corporate balance sheets and tight credit
• weak aggregate demand
• uncertainty about economic policy
But structural headwinds continue to slow productivity:
• ICT boom waning
• aging workforce, slower human capital gains
• global trade integration slowing, e.g., China
• benefits of earlier EMDC reforms fading
Israel’s Labor Productivity Growth has also Slowed Primarily in Manufacturing
14
-10
-5
0
5
10
15
-10
-5
0
5
10
15
1996 1999 2002 2005 2008 2011 2014
Whole economy
Manufacturing
Sources: Central Bureau of Statistics; and IMF staff calculations.
Labor Productivity Growth
(Percent)
1.3%0.5%
4%
0.4%
ProductivityGrowth %
1996-2007
2011-2016
Total 1.3 0.5
Manufacturing 4.0 0.4
Other 0.8 0.7
Labor’s share of income has fallen in many countries including Israel
15
Israel
Decline in Israel’s labor share broadly in parallel with AE
16
30
35
40
45
50
55
60
30
35
40
45
50
55
60
1970197519801985199019952000200520102015
Israel
Advanced Economies (AE)
Emerging and Developing
Economies (EMDE)
Labor Share of Income
(Percent)
Source: World Economic Outlook, April 2017.
90
92
94
96
98
100
102
104
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Ratio of Israeli Labor Share to Advanced Economy
Labor Share (Index, 1995=100)
Sources: World Economic Outlook, April 2017; and Fund staff calculations.
But Israel’s labor share decline
continued post crisis?
(May reflect terms of
trade gains over 20%
since 2008, rather than
real wages rising slower
than labor productivity.)
Technology key driver of declining labor shares in AEs, and Global Value Chain participation in EMs. “Hollowing out” of medium-skilled
–8
–6
–4
–2
0
2
4
6
AEs EMs EMs exluding China
Aggregate Results: Contributions to Aggregate Labor Share
Changes, 1993–2014(Deviation from regression constant)
Technology Financial integration UnexplainedGVC participation Policy/institutions Actual change
Contributions to Aggregate Labor Share Change by Skill,
1995–2009
–8
–6
–4
–2
0
2
4
6
8
10
12
High skill Middle skill Low skill Middle-skill AEs
Technology Global value chain participationFinancial integration Skill supply and other composition shiftsActual change
Implications of broader trends for Israel• Global productivity growth may remain
below prior trends
→ Reduce Israel’s productivity shortfalls to the major advanced economies to help sustain solid growth
• Technology appears to be reducing labor shares which constrains real wage growth
→ Improve the skills of Israel’s labor force to limit these pressures on living standards
18
0
10
20
30
40
50
60
70
80
90
0
10
20
30
40
50
60
70
80
90
LTA
EST
KO
RP
OR
GR
CC
ZE
ISR
SV
NN
ZL
1/
SV
KJP
NIS
L 1/
ITA
ESP
GB
RC
AN
FIN
AU
SA
UT
CH
ESW
ED
EU
FR
AN
LDD
EN
USA
BEL
IRL
NO
RLU
X
Labor Productivity Comparison, 2015
(GDP per hour worked, USD constant prices 2010PPPs)
Sources: OECD; and IMF staff calculation.
Note: 1/ 2014 data is used due to data availability.
Policies for strong and inclusive growth in Israel
Education and infrastructure investment
• Reform education to reduce achievement gaps
• Training to boost skills of those already in work
• Upgrade public transport infrastructure
Product market reforms to boost productivity
• Lower barriers to external competition
• Reduce regulatory burden, e.g., “one-stop-shop”
• Reform state enterprises
Broaden labor participation
• Expand active labor market policies (ALMP)
• Enhance environment for job creation by SMEs
• Raise the EITC—welcome recent MoF proposal 19
0
20
40
60
80
100
120
0
20
40
60
80
100
120
2001 2003 2005 2007 2009 2011 2013 2015
Haredi Male Haredi Female Arab Male
Arab Female Jewish Male Jewish Female
Sources: CBS; and IMF staff calculations.
Labor Force Participation Rate by Cohorts
(percent)
2003-05:
Cut child
allowance
2005-07:
Mehalev
Program
2007-09:
Visions for Employment Program
Macroeconomic policies for global growth recovery subject to downside risks
Supportive environment for structural reforms while protecting fiscal buffers:
• Monetary policy: remain accommodative pending a durable rise in inflation
• Fiscal policy: ensure Israel has substantial fiscal space to help cushion shocks
– Achieve central government deficit of around 2% of GDP over the cycle, which will keep public debt around 60% of GDP
– Generate spending savings and revenue gains to enable enhanced investment in education and infrastructure, plus expanded ALMP and EITC.
• Housing: reforms to generate lasting supply gains to meet rising population needs
• Macroprudential policy: appropriately tight, Bank of Israel to monitor closely
• Financial sector: safeguard stability during reforms to promote efficiency 20
Thank you!
תודה!
21
World
Advanced
Economies U.S. U.K. Japan Euro Area Germany Canada
Other
Advanced
Asia
2016 3.1 1.7 1.6 1.8 1.0 1.7 1.8 1.4 2.3
2017 3.5 2.0 2.3 2.0 1.2 1.7 1.6 1.9 2.5
Revision
from Oct.
20160.1 0.2 0.1 0.9 0.6 0.2 0.2 0.0 0.0
2018 3.6 2.0 2.5 1.5 0.6 1.6 1.5 2.0 2.6
Revision
from Oct.
20160.0 0.2 0.4 –0.2 0.1 0.0 0.1 0.1 –0.1
Growth projections: Advanced economies (percent change from a year earlier)
Sources: IMF, World Economic Outlook October 2016 Update; and IMF, World Economic Outlook April 2017.22
World
Emerging
Market and
Developing
Economies China India Brazil Russia
Commodity
Exporting
Economies
Low Income
Developing
Countries
2016 3.1 4.1 6.7 6.8 –3.6 –0.2 1.0 3.6
2017 3.5 4.5 6.6 7.2 0.2 1.4 2.3 4.7
Revision from
Oct. 20160.1 –0.1 0.4 –0.4 –0.3 0.3 –0.2 –0.2
2018 3.6 4.8 6.2 7.7 1.7 1.4 2.9 5.3
Revision from
Oct. 20160.0 0.0 0.2 0.0 0.2 0.2 –0.1 0.1
Growth projections: Emerging markets and LIDCs(percent change from a year earlier)
Sources: IMF, World Economic Outlook October 2016 Update; and IMF, World Economic Outlook April 2017 23