Israel

SUBTITLE
Macroeconomic performance
Small open economy, meaning two transmission modes: net exports
and investments
EMP leads to increase in money suppy, wich leads to fall in interest
rates, this causes increase in investments and increase in cash
outflow (fii), which leads to drop in exchange rates, leading to increase
in net exports. Thus gdp increases
Macroeconomic performance
GDP and growth forecast: Values in NIS Billion
Year 2011 2012 2013 2014 2015 2016E 2017E 2018E
Real GDP (Year 2010 base
price)
918 940 981 1,011 1,036 1,070 1,107 1,143
Private consumption ( C) 514 529 549 572 597 631 655 678
General government
expenditure (G)
202 209 217 224 232 242 251 258
Gross fixed capital formation (I) 186 198 199 206 212 221 243 254
Exports of goods and services 336 330 341 346 331 342 353 367
Imports of goods and services 319 326 325 337 336 366 395 414
Net exports (NX) 17 4 17 9 -4 -24 -42 -47
Nominal GDP 935 993 1,059 1,105 1,164 1,223 1,282 1,343
GDP
Source : OECD deflator
Economic 102
Outlook 100 database 106 108 109 112 114 116 118
GDP Composition
Net exports (NX) is expected to decline in
70% 5.0%
Year 2016, 2017 & 2018. This is due to 60% 56% 56% 4.3% 56% 57% 58% 59% 59% 59% 4.5%

appreciation of Shekel (Israeli currency) 50% 3.4% 3.3%

4.0%
3.5%
against dollar 40% 3.1% 3.3%
3.0%
Real GDP growth is estimated to be 3.3% 30%
22%2.3% 22%
21% 22% 22%
2.5%
22% 23% 23%
22% 23%
22%
2.5%
20% 20% 20% 20% 21%
& 3.4% for Year 2016 and 2017. 20% 2.0%
1.5%
Whereas, Nominal GDP is forecasted to 10%
2% 0% 2% 1% 1.0%
0%
grow at an annual growth rate of 5.07% & -10%
2011 2012 2013 2014 20150% 2016E
-2% 2017E
-4%
2018E
0.5%
-4% 0.0%
4.87% for Year 2016 & 2017 respectively. Private consumption ( C) General government expenditure (G)
Domestic consumption (C ) constitutes for Gross fixed capital formation (I) Net exports (NX)
Real GDP growth (%)
more than 50% of GDP
Macroeconomic performance Unemployment
Inflation:
Inflation Inflatio
n
112 8.00%
Inflation (CPI) follows Housing, 110 7.00%
7.00% 108 6.00%
which constitutes 25% weight in 5.88% 106
6.00% 5.00%
CPI. 104 4.00%
5.00% 102
100 3.00%
Year 2015 & 2016 experienced 4.00%
3.43%
3.71%
98 2.00%
3.00% 1.00%
negative inflation owing to shift in 3.00% 2.49% 2.28%
96
government policies and external 2.12% 94 0.00%
2.00% 1.62% 1.50%
factors:
0.70%
1.00% 0.45%
1. Government slashed prices for 0.00% -0.62% -0.54%
things likebus tickets, water 2011 2012 2013 2014 2015 2016 2017E Average quaterly real wage Index
-1.00%
and electricity Unemployment rate

2. Tackling housing bubble by CPI weights

means of both Fiscal Decreasing trend in
policies( hiking tax on property unemployment rate, with lowest
purchase) and monetary rate being 4.74% (Q3, 2016)
polices (increasing capital Miscel-laneous; 5%
Food (excl. fruit & veg.); 14%
requirement imposed on indicating natural rate of
Transport & communic.; 20%Fruit & veg.; 3%
financial institutions making unemployment
mortgage loans) Increasing real wage index,
3. Industries, such as air travel or Health; 6% implying that with low level of
Housing; 25%
food, which were previously unemployment, wages rise as
insulated from the global Education, culture & enter-tainment; 12% employers dont have a big pool of
market, were opened to new Clothing
Furniture &&home
footwear;
Housing 3%
equipment; 4% 10%
main-tenance; job seekers to choose from.
competitors, helping prices to
fall
4. Lower import prices (on
Macroeconomic performance
Balance of Payments Values in USD Million

Current Account Balance Financial Account Balance

Direct Portfolio Other
Capital Statistic
Service Current Surplus/Defi investment investment investment Net Surplus/Defi
Goods Accoun al
Year s Transfer Income cit in financial Reserve cit in
accoun In t Discrep
accoun s account Current Abroa In In derivativ assets Financial
t Israe Abroad Abroad Balance ancies
t account Account d Israel Israel es Account
l
8,72 -
-7,506 9,007 8,588 -3,425 6,664 -9,166 -3,450 -683 1,523 -12 -4,535 -12,965 1,445 4,856
2011 8 5,370
8,46 - -
-9,022 9,612 7,897 -6,922 1,565 -3,257 -7,531 2,409 297 179 -6,435 877 3,993
2012 8 3,323 3,677
12,4
-7,125 13,750 8,968 -5,762 9,831 -5,502 -9,348 1,771 -4,177 -812 458 -4,357 -9,519 1,863 -2,176
2013 48
6,73 -
-6,727 12,299 9,834 -3,490 11,916 -3,667 -10,337 9,555 -4,687 421 -7,395 -15,968 2,733 1,320
2014 8 6,597
11,5 [2]-
Table 2: Balance
-3,392 of Payments
12,398 9,030 -4,304 (Source:
13,732 Central
-9,884 Bureau of
-9,902 Statistics,
3,141 3,382Israel ) 274 -7,328 -14,013 2,191 -1,910
2015 10 5,205
There has been an increasing trend of Current account surplus owing to following reasons:
1. Narrowing of balance of goods due to decrease in import of fuels (as oil prices decreased[1] )
2. Narrowing of the primary income deficit due to the increase in incomes earned by Israelis from direct
foreign investment abroad and from portfolio investments
Increase in foreign direct investment in the form of expensive takeovers of Israeli tech firms
Due to both of these trends, Local currency has appreciated and Bank of Israel has taken following measures to
contain:
Reduction in interest rate which has led to decrease in the Foreign portfolio investment
Increase in purchase of foreign exchange reserves (see reserve assets)
Macroeconomic performance
Government Budget Deficit & Debt: Index of Industrial Production:
0.00% 71.00% 114 113
2010 2011 2012 2013 2014
112
-0.50% 70.50% 110.27 110.34 110.44
70.00%
110 109.15
108.16 108.54 108.71
-1.00% 107.99
107.75
108 107.14 107.21 107.34 107.45
69.00% 106.76
106 105.5
-1.50% 68.72% 104.55 104.92
68.00%
104103.6 102.88
-2.00% 67.81% 102.37 102.33
101.86
102
67.00%
67.16%
-2.50% 100
-2.50% 66.69%
66.00% 98
-3.00% -2.80% -2.85%
-3.15% 96
-3.50% 65.00%

-3.70%
-4.00% 64.00%
Index of Industrial Production
Govt. Budget Deficit (% of GDP) Govt. Debt (% of GDP)

Source: Bank of Israel

Figure 5: Govt Deficit & Debt
Budget deficit narrowed due to increase in
tax collections
Decrease in budgetary deficit has led to
reduction in Debt to GDP ratio, indicating
strong Sovereign credit rating.
Macroeconomic Difficulties
Exchange rate (ILS/USD)
Problem : Currency appreciation 4.1000
4.0000
Foreign exchange rate has been appreciating since Year 2012 3.9000
3.8000
because of following: 3.7000
3.6000
3.5000
1. Increase in Current account surplus as imports have reduced, 3.4000
3.3000
which in turn is caused by falling energy prices 3.2000
3.1000
2. Increase in foreign direct investment in the form of expensive
takeovers of Israeli tech firms

Due to Israeli Shekel appreciation:

Number of tourist arrivals (in 1000s)
1. Israelis High-Tech industry, which is the driver of export 3,000.0

growth, is unable to do exports. Thus export growth is halted 2,950.0

and cannot drive overall economic growth
2,900.0

2. Performance of Tourism, which constitutes % of economy, has 2,850.0

been declining as the country is becoming expensive for 2,800.0

tourists. This can lead to unemployment in this sector
2,750.0

3. Domestic manufacturing has been affected as strong Shekel 2,700.0

2011 2012 2013 2014 2015
makes it difficult to compete with imports, along with the fact
that some countries have a cheaper labor market.
Macroeconomic Difficulties
Problem : Currency appreciation
Actual rate
Solution (effective)
3.00
Presently, Bank of Israel has taken following steps:
2.50

1. Increase in foreign exchange reserves to prevent 2.00

revaluation of Shekel 1.50

2. Reduction in interest rate from 2.79% in 2012 to 1.00

0.1% in 2016. In addition to above measures, excess 0.50

savings could be used for domestic investment: 0.00

1.Current account surplus means that there is excess

savings generated by Israeli economy , which is being
channeled overseas

2. If excess savings are used for domestic investment,

then Shekel will depreciate
Macroeconomic Difficulties
Problem : High level of inequality

Income Inequality

This inequality can be measured using Gini coefficients. The Gini coefficient value of 0 stands for total
equality and 1 for extreme inequality.
Gini Coefficients
0.39
0.38
0.37 0.37

0.35 0.35
0.34
0.33

0.31
0.3
0.29

0.27

0.25
1992 1997 2001 2007 2010
Implications of inequality:

1.National security

According to Central Bureau of Statistics (Israel), the demographic weight of ultra-poor i.e., Ultra
unorthodox and the Arabs, is going to increase to 25%. As the GDP contribution of this group is low,
therefore army resources both in terms of recruits and budgets-will be greatly reduced
Macroeconomic Difficulties
Problem : High level of inequality

Solution

Fiscal policies that could reduce inequality:

1. Negative income tax program

Under this program, the ultra poor groups can be given grants to incentivize them to
continue working and to incentivize others to join the labor group.

2. Investing in human infrastructure

Policy steps in following areas could strengthen poor population segments:

a. transportation infrastructure
b. help to working mothers (such as day-care centers)
c. employment matching centers
d. legislation against discrimination and effective enforcement of such laws
e. encouraging the employment of academic
Macroeconomic difficulties
Sluggish GDP growth when compared with OECD countries
Deflation
Appreciation of Shekel zero interest rate policies
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Second bullet point here Class 1 82 95

Third bullet point here Class 2 76 88

Class 3 84 90
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