The Israeli Economy: Current Trends, Strength and Challenges

IRMC Conference

Dr. Karnit Flug

Governor of the Bank of Israel

13.06.2016

1

-4

-2

0

2

4

6

8

10

GDP Growth Rates

GDP annual % change (2000-2017F)

2 Source: IMF

Forecast

Israel

Advanced Economies

Developing Economies

*Simple average for 21 rich OECD countries and emerging markets according to IMF definition

GDP per capita Growth Rates

GDP per capita annual % change (2000-2015)

3 Source : IMF

Israel

Developing Economies

Advanced Economies

*Simple average for 21 rich OECD countries and emerging markets according to IMF definition

-6

-4

-2

0

2

4

6

8

Source : Bol and IMF

4

0

20

40

60

80

100

120

140

World Trade

*Excl. diamonds and start-ups

Index 2008=100

Israeli Exports

Israel’s Goods and Services Exports and World Trade, 1996-2017F

Forecast

-4

-2

0

2

4

6

8

10

2007 2008 2009 2010 2011 2012 2013 2014 2015

%

Public consumption

Private consumption

Exports (excl. diamonds )

Investment

Total increase in uses

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

2007-2015

Source: BoI Report 2015, CBS

Structural Change in the Composition of Growth –Private Consumption is Leading While Exports are in Stagnation

5

6

4.5

79.6

76.0

64

66

68

70

72

74

76

78

80

82

4

5

6

7

8

9

10

11

12

13

Participation Rate

Employment rate

Unemployment rate

Labor Market Quarterly, 1995-2016, 25-64

% %

Source : Central Bureau of Statistics Labor Force Survey

Real Wage per Employee Post* 1995-2015

NIS

*Seasonally adjusted, 12 months moving average, 2015 prices

Source : Central Bureau of Statistics Data

7,500

8,000

8,500

9,000

9,500

10,000

Total Public Sector Business Sector

7

Bank of Israel Policy

BOI’s Policy Objectives

Maintain price stability, as the central goal.

Support economic policy, primarily growth, employment and reducing social gaps.

Support the stability and orderly activity of the financial system.

9

1.4

-0.9

-4

-2

0

2

4

6

8

* Forward inflation expectations 3-5 years

%

Inflation 12 month

Expectations Forward*

Actual Inflation and Inflation Expectations 2006-2016

10 Source: Bol

Inflation excluding energy and regulation

0.4

0.6

-0.9

-2

-1

0

1

2

3

4

5

6

09

/13

10

/13

11

/13

12

/13

01

/14

02

/14

03

/14

04

/14

05

/14

06

/14

07

/14

08

/14

09

/14

10

/14

11

/14

12

/14

01

/15

02

/15

03

/15

04

/15

05

/15

06

/15

07

/15

08

/15

09

/15

10

/15

11

/15

12

/15

01

/16

02

/16

03

/16

04

/16

Inflation excluding energy, food, fruit and vegetables, and without regulation

Source : CBS (Israel) & BoI

Annual inflation

Factors of a One-Off Nature and Energy Prices Contribute to the Low Inflation

11

%

-60

-50

-40

-30

-20

-10

0

10

20

30

40

09/1

3 1

1/1

3 0

1/1

4 0

3/1

4 0

5/1

4 0

7/1

4 0

9/1

4 1

1/1

4 0

1/1

5 0

3/1

5 0

5/1

5 0

7/1

5 0

9/1

5 1

1/1

5 0

1/1

6 0

3/1

6 0

5/1

6

CommoditiesExcl. Energy

Brent Crude OilPrice

Energy and Commodity Prices Declined

*12-month % change

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

/12

03

/12

05

/12

07

/12

09

/12

11

/12

01

/13

03

/13

05

/13

07

/13

09

/13

11

/13

01

/14

03

/14

05

/14

07

/14

09

/14

11

/14

01

/15

03

/15

05

/15

07

/15

09

/15

11

/15

01

/16

03

/16

05

/16

NIS/$

/€ NIS

Exchange Rates 2012-2016

NIS Index

Nominal Effective

12 Source : BoI

40

60

80

100

120

140

160

180

200

220

01/0

5 0

6/0

5 1

1/0

5 0

4/0

6 0

9/0

6 0

2/0

7 0

7/0

7 1

2/0

7 0

5/0

8 1

0/0

8 0

3/0

9 0

8/0

9 0

1/1

0 0

6/1

0 1

1/1

0 0

4/1

1 0

9/1

1 0

2/1

2 0

7/1

2 1

2/1

2 0

5/1

3 1

0/1

3 0

3/1

4 0

8/1

4 0

1/1

5 0

6/1

5 1

1/1

5

Loans for residential purposes

Survey of home prices

Index

Survey of Home Price and Loans for Residential Purposes 2005-2016, Monthly

Source : Bank of Israel, Banking Supervision Department 13

Bank of Israel Policy Tools 2007-2016

0.1 0

1

2

3

4

5

01/0

7 0

6/0

7 1

1/0

7 0

4/0

8 0

9/0

8 0

2/0

9 0

7/0

9 1

2/0

9 0

5/1

0 1

0/1

0 0

3/1

1 0

8/1

1 0

1/1

2 0

6/1

2 1

1/1

2 0

4/1

3 0

9/1

3 0

2/1

4 0

7/1

4 1

2/1

4 0

5/1

5 1

0/1

5 0

3/1

6

FX Intervention

(US$)

Interest Rate (%)

01/0009/1305/2701/4110/5406/6802/8210/9507/0903/23

01/0

7 0

6/0

7 1

1/0

7 0

4/0

8 0

9/0

8 0

2/0

9 0

7/0

9 1

2/0

9 0

5/1

0 1

0/1

0 0

3/1

1 0

8/1

1 0

1/1

2 0

6/1

2 1

1/1

2 0

4/1

3 0

9/1

3 0

2/1

4 0

7/1

4 1

2/1

4 0

5/1

5 1

0/1

5 0

3/1

6

Additional provision

for high LTV loans

Higher capital

requirements for

high LTV

Variable Interest

Rate limit

LTV limit

PTI limit and

capital requirem

ent

Higher capital

requirements for high LTV

Bond purchases 5 Billion $

Higher capital

requirements

Macroprudential

Measures

14

Natural Gas Purchase program + Intervention

Building reserves Intervention

“The Monetary Committee assesses that monetary policy

will remain accommodative for a considerable time”

0

500

1,000

1,500

2,000

2,500

3,000

01/0

7 0

6/0

7 1

1/0

7 0

4/0

8 0

9/0

8 0

2/0

9 0

7/0

9 1

2/0

9 0

5/1

0 1

0/1

0 0

3/1

1 0

8/1

1 0

1/1

2 0

6/1

2 1

1/1

2 0

4/1

3 0

9/1

3 0

2/1

4 0

7/1

4 1

2/1

4 0

5/1

5 1

0/1

5 0

3/1

6

Source : Bol

Fiscal Policy

Budget Deficit* and Deficit Target (Percent of GDP, 2000-2016)

%

*Percent of GDP; excluding credit extended. The data refers to the deficit excluding the Bank of Israel’s profits.

Source : Bol 16

2.9 2.9

0

1

2

3

4

5

6

7

Source : The Bol and the OECD. 17

40

50

60

70

80

90

100

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

%

Public Debt - Israel

Public Debt - OECD*

1.6

3.0

-4.0

-2.0

0.0

2.0

4.0

No

rway

Luxem

bo

urg

Eston

iaSw

ede

nK

ore

aSw

itzerland

Finlan

dD

en

mark

New

Zealand

Can

ada

Au

straliaC

zech

…Jap

anN

etherlan

ds

Germ

any

Po

land

OEC

DSlo

vak…Fran

ceA

ustria

Un

ited

…B

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d State

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Hu

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Gree

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ortu

gal

General government net debt interest payments Per cent of nominal GDP 2015

Public Debt in Israel is Decreasing but Net Interest Payments are Still High in International Comparison

0

5

10

15

20

25

30

35

40

45

50

Direct

Indirect

%

30.7

34.4

Source : OECD Revenue Statistics 2015

Tax Burden 2014, Percent of GDP

18

*2013 data

%

Public Expenditure Percent of GDP, 2014

38.7

45.2

15

20

25

30

35

40

45

50

55

60

19 Source : OECD

30.7

42.2

15

20

25

30

35

40

45

50

55

60

Source :OECD and the Bol

• The data is calculated by decreasing the net debt interest payments and defense expenditure from the general government total outlays

%

Civilian Public Expenditure Excluding Interest Percent of GDP, 2014

20

Behind the Engine of Growth - Strengths

33.5

48.5

0

10

20

30

40

50

60

Share of the Population Aged 25-64 with Tertiary-Level Education , 2014

%

Source : OECD Education at a Glance 2015 22

Israel is Leading in International Innovation Rankings

Source: World Economic Forum 2015 &Bloomberg 23

Factors in Israel that encourage innovation Quality universities that provide the economy with human

capital, scientific aptitude, and technological abilities Collaboration between the universities and industry Government support for commercial R&D Developed venture capital industry

Ranking 3 5

Index

• 73 Israeli companies are listed on Nasdaq

• Over 300 international companies established Israeli R&D centers

• More than 4,000 startups : The world’s greatest concentration of

high tech companies outside Silicon Valley

• Leading in cyber security: 430 cyber security companies and

startups. In 2015, Israel’s share of private investment in the field was

nearly 20% (second only to the US).

Source: IMF WEO April 2014, Israel innovation authority, Nasdaq, The National Cyber Bureau 24

Israel’s Relative Advantages - Technology

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

25

Triadic patent families Number per million inhabitants, 2013

Source: OECD Factbook 2015-2016

125 148

Israel’s Relative Advantages – Water Innovation

• World leader in desalination; With a network of five coastal

desalination plants, which together produce 75% of all water

supply to households.

• Leading in Waste-Water Recycling with a rate of 80%.

• Israel developed and patented the “Drip Irrigation”, that has not

only produced huge reduction in agricultural water use, but has also

vastly increased yields, and it is used worldwide.

26 Source: The Israel water authority , “Natafim”, “Mekorot”.

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

0.35%

0.40%

0.45%

Isra

el

Un

ited

Sta

tes

Can

ada

Swed

en

Ko

rea

Fin

lan

d

OEC

D

Irel

and

Jap

an

Un

ited

Kin

gdo

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Swit

zerl

and

No

rway

Hu

nga

ry

Fran

ce

Po

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Be

lgiu

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Net

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Den

mar

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New

Zea

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Ger

man

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Esto

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Au

stri

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Au

stra

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Spai

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Rep

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ch R

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Po

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Ital

y

Gre

ece

Later stage venture Seed/start-up/early stage

Venture Capital Investment as % of GDP, 2014

Source : OECD 27

28

Agriculture, forestry and fishing

Food products, beverages and tobacco

Textiles, leather and footwear

Wood and products of wood and cork

Pulp, paper, paper products, printing and

publishing

Rubber and plastics products

non-metallic mineral products

Basic metals and fabricated metal products

Machinery and equipment

Electrical & optical equipment

Transport equipment

Electricity gas and water supply

Construction

Wholesale and retail trade

Hotels and restaurants

Transport, storage and communications

Financial intermediation

Real estate, renting and business activities

Chemicals

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

Productivity Ratio

Exports as share of the industry’s output

Productivity Gap—Israel vs. OECD Average, and Exports’ Share of Output in Israel, by Industry, 2010

Source : Eurostat, OECD, BoI, CBS (Israel)

Long Term Challenges

$

Source : The Conference Board Total Economy Database 2015

Output Per Hour Worked 1995-2015,$ PPP, 2015 Constant Prices

30

0.000

10.000

20.000

30.000

40.000

50.000

60.000

70.000

Israel

OECD

21 Rich Countries

31

Agriculture, forestry and fishing

Food products, beverages and tobacco

Textiles, leather and footwear

Wood and products of wood and cork

Pulp, paper, paper products, printing and

publishing

Rubber and plastics products

non-metallic mineral products

Basic metals and fabricated metal products

Machinery and equipment

Electrical & optical equipment

Transport equipment

Construction

Wholesale and retail trade

Hotels and restaurants

Transport, storage and communications

Financial intermediation

Real estate, renting and business activities

Chemicals

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

Productivity Ratio

Exports as share of the industry’s output

Productivity Gap—Israel vs. OECD Average, and Exports’ Share of Output in Israel, by Industry, 2010

Source : Eurostat, OECD, BOI, CBS (Israel)

0

10

20

30

40

50

60

70

80

90

100

Jewish Non-Ultraorthodox Women

Ultraorthodox Women

Arab Women

OECD Women

32

%

Source : Based on Central Bureau of Statistics Data

Women Employment Rate, 25-64

10

20

30

40

50

60

70

80

90

100

Jewish Non-Ultraorthodox Men

Ultraorthodox Men

Arab Men

OECD Men

% Men Employment Rate, 25-64

Employment Rate by Population Groups

0

0.1

0.2

0.3

0.4

0.5

0.6

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Swit

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Icel

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Net

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gary

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Po

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ece

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and

Gini Index, 2012*, at disposable income, post taxes and transfers

Source : Based on Central Bureau of Statistics Data and OECD 33

Strength of the effect of tax policy and transfer payments on

the Gini Index, 2012

0

0.1

0.2

0.3

0.4

0.5

0.6

Den

mar

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k R

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rael

Un

ited

Sta

tes

Turk

eyIs

rael

Gini Index, 2012*, at market income, before taxes and transfers

Economic Income Inequality is Similar to the OECD Average, but the Effect of Policy, Particularly Transfer Payments, is Low in International Comparison.

0.0

0.1

0.2

0.3

0.4

0.5

Swit

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and

Isra

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Contribution of tax system

Contribution of transfer payments

*Israel data for 2014

34

Integrate population sectors into the labor market: Active labor market policy

• Ultra-Orthodox (men)

• Arab (women)

• Older workers (around retirement age)

Increase human capital: Education and professional training

Remove obstacles to growth and productivity

• Infrastructure

• Business environment

• Competitiveness

• Promote reforms (ports, electricity, and the natural gas and energy industry)

• Research and development

Increasing quality and efficiency of public service systems (health, long-term care, welfare, pension, etc.)

Diversify trade geographically and by industry

The Need to Formulate a Focused Strategic Plan:

Thank You