The Israeli Economy - mof.gov.il · The gross inequality in Israel, in contrast to the developments...
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Presentation to the IMF February 2016 The Israeli Economy Recent Developments, Economic Trends and Outlook
Transcript of The Israeli Economy - mof.gov.il · The gross inequality in Israel, in contrast to the developments...
Presentation to the IMF February 2016
The Israeli Economy Recent Developments, Economic Trends and
Outlook
• Recent Developments
• Economic Trends
• Growth Potential in the Medium Term
• 2015-2016 Budget Forecasts
Outline
2
Israel’s GDP per capita is slightly below the OECD average
3
Source: OECD.
54.4
39.2 39.2 33.7
0
20
40
60
80
100
GDP per Capita Thousand USD, Current Prices, Current PPPs
50%
60%
70%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
GDP per cap. of Israel as % of the US
Due to the relatively low growth rates in recent years, the output gap widened, yet is still close to zero, contrary to most developed countries
4
Positive values represent that the actual GDP is higher than the potential GDP.
Source: OECD, November 2015 EO.
-16%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%Output Gap
As percentage of the Potential GDP, 2015
Israel OECD
During the past four years, the GDP growth rate slowed down to an annual average of 2.8%, slightly below the equilibrium growth rate
5 Source: CBS.
6.2%
4.1% 4.3% 3.7%
8.9%
0.2%
-0.1%
1.2%
5.1%
4.4%
5.8% 6.1%
3.1%
1.3%
5.5% 5.0%
2.9% 3.3%
2.6% 2.6%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Israeli GDP Real Growth Rate
Second Intifada and the Dot-Com Crisis
Global Economic
Crisis
During the past 4 years, consumption has been the main growth engine,
whereas investments and exports have had a marginal contribution
Source: CBS, Chief Economist Department Calculations
5.4%
2.2%
5.3%
2.8%
-10%
-5%
0%
5%
10%
2004-2007 2008-2009 2010-2011 2012-2015
Contribution to the GDP Real Growth By GDP Components
Private Consumption Public Consumption
Gross Investment Exports of Goods and Services
Imports of Goods and Services
6
Since 2012, exports of goods and exports of services showed weakness
Source: CBS, CPB.
0
1000
2000
3000
4000
5000
6000
7000
0
5
10
15
20
25
30
35
2009 2010 2011 2012 2013 2014 2015
0
20
40
60
80
100
120
140
160
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
0
10
20
30
40
50
60
70
80
World trade (RHS)
Exports of goods (LHS)
Exports of goods Billions ILS Index Exports of goods
2010 prices
Exports of services 2010 Prices
NASDAQ Quarterly
Billions ILS
7
NASDAQ (RHS)
Exports of services (LHS)
The High-Tech sector, the decline in energy prices and the start of gas production, contribute to a growing surplus in the current account
8
* First three quarters annualized.
Source: CBS.
-4.8% -4.6%
-2.8%
-0.7% -1.4% -1.4% -1.4% -0.9%
0.8%
2.0%
3.5%
4.8%
3.3%
1.4%
3.9% 3.5% 2.6%
1.6%
2.9% 3.7%
4.4%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
-6
-4
-2
0
2
4
6
8
10
12
14 Current Account Balance In billions of USD and as percentage of GDP
Billions of dollars (LHS)
GPD percentage (RHS)
Due to negative interest rates in European countries, other developed
countries suffer from appreciation of their currencies
9
Denmark*
Sweden*
Euro Area*
Israel
UK
USA
85
90
95
100
105
110
115
120Real Effective Exchange Rate
Jan 2014 = 100 Increase reflects appreciation
0.50%
0.25%
1.00%
0.20% 0.25%
0.75%
0.50% 0.50%
0.10% 0.05% 0.05%
-0.35% -0.4%
-0.2%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
Britain USA Israel Denmark* ECB* Sweden
Central Banks Interest Rates
Jan-14
Feb-16
* The interest rate on commercial banks deposits in the central bank is negative in these countries
Source: BIS, Global-rates.
Israel has a low unemployment rate by international comparison and is close to full employment
10 Source: OECD.
10.4%
6.6% 5.2% 4.9%
0%
5%
10%
15%
20%
25%Unemployment Rate - International Comparison
From age 15 and above, latest available monthly data
After a significant improvement in the labor market between 2004-2014, the employment rate leveled at a high rate in 2015
11 Source: CBS.
5.3% 5.2%
64.1% 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
Jan
-14
Feb
-14
Mar
-14
Ap
r-14
May
-14
Jun-
14Ju
l-14
Au
g-14
Sep
-14
Oct
-14
No
v-14
Dec
-14
Jan
-15
Feb
-15
Mar
-15
Ap
r-15
May
-15
Jun-
15Ju
l-15
Au
g-15
Sep
-15
Oct
-15
No
v-15
Dec
-15
Participation Rate and Unemployment Rate in Israel From age 15 and above
Participation Rate (RHS)
Unemployment Rate (LHS)
The stabilization in the labor market, evident also in the slowdown of the employee jobs’ growth rate, is not due to demand side constraints
* The sum of job vacancies and employee lobs
Source: BoI, CBS, Chief Economist Department Calculations
-2%
0%
2%
4%
6%
2007 2008 2009 2010 2011 2012 2013 2014 2015
Number of Employee Jobs Growth rate compared to the same
month in previous year
Public Services
Business Sector
Total
12
1%
2%
3%
4%
Jan
-10
Jul-
10
Jan
-11
Jul-
11
Jan
-12
Jul-
12
Jan
-13
Jul-
13
Jan
-14
Jul-
14
Jan
-15
Jul-
15
Jan
-16
Job Vacancies Rate As a share of total jobs*
Dotted lines - Annual averages
Due to supply constraints in the labor market, real wages’ growth
rate has accelerated since the beginning of 2014
Source: BoI, CBS, Chief Economist Department Calculations 13
-6%
-4%
-2%
0%
2%
4%
6% Average Monthly Wages Per Employee Job Real growth rate compared to the same month in previous year
Public Services
Business Sector
Total
Inflation rate was influenced by the drop in commodity prices and by government initiatives aimed at reducing the cost of living
14
* Inflation expectation as derived from the capital market
Source: CBS, Chief Economist Department Calculations
Estimate of the effects of government policy on the consumer price index
Effect on the average CPI in 2016
Rate of reduction (estimation)
0.5%- 1%- VAT decrease
0.04%- 5% Public transportation
reform
0.07%- 14.5%* Reduction in public
transportation prices
0.10%- 14.5%* Water price
reduction
-0.06% -3%-5% Price controlled items
-0.6%
-0.3%
0.8%
-2%
0%
2%
4%
6%
CPI Inflation rate and Inflation Expectation*
Inflation Rate
Inflation Expectation- 1 year forwardInflation Expectation- 5 years forward
Real appreciation of the NIS and the slowdown in inflation, led the
BoI to decrease the nominal interest rate to a record low
Source: BoI, Chief Economist Department Calculations
Real Interset Rate
Nominal Interest Rate
-4%
-2%
0%
2%
4%
6% Nominal and Real Interest Rates
15
The low interest rates led to an increase in the price of financial and real assets
16 Source: CBS, TASE, Chief Economist Department Calculations
-5%
0%
5%
10%
15%
20%
25%
30%
35%
60
80
100
120
140
160
180
200
220
240
260 Asset prices and real interest rate For Asset Prices - Jan 2009 = 100
TA 100
Apartments
Sovereign Bonds
Real interest (RHS)
The declining trend of military expenditure and interest payments enabled
the government to moderate the decrease in civilian expenditure
17 Source: CBS, Chief Economist Department Calculations
36% 37% 36% 35% 34% 33% 35% 35% 35% 33% 32% 32% 31% 31% 32% 31% 31% 31% 32% 32% 31%
6% 6% 6% 6% 5% 5%
5% 5% 5% 5%
5% 4% 4% 3% 3% 3% 3% 3% 3% 3% 3%
8% 9% 8% 8% 8% 8%
8% 9% 8% 8%
8% 8% 7% 7% 6% 6% 6% 6% 6% 6% 6%
50.9% 50.8% 50.1% 48.9%
47.8% 45.7%
48.1% 49.0% 48.5%
45.4% 43.9% 43.7%
42.2% 41.4% 41.5% 40.7% 40.1% 40.4% 40.6% 40.3% 40.1%
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
General Government Expenditure By target, as percentage of GDP
Civilian expenditure Interest payments Military expenditure
The downward trend of the debt led to a reduction of interest payments and contributed to economic stability
18 Source: MoF, CBS, Chief Economist Department Calculations
98.9%
96.6% 95.1%
96.4%
90.3%
80.1%
84.4%
91.0%
93.8% 92.2%
88.9%
81.1%
74.0% 72.9%
75.1%
71.3% 69.8%
68.6% 67.6% 67.1%
64.9%
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
Public Debt As percentage of GDP
Global Economic
Crisis
In 2015 the central government deficit amounted to 2.1 percent of GDP. The deficit ceiling for 2016 was set at 2.9 percent of GDP.
19
Source: MOF and CBS.
3.7% 3.4%
2.4%
2.0% 2.2%
0.6%
3.9%
3.3%
5.0%
3.3%
1.7%
0.9%
0.0%
2.1%
4.8%
3.4%
3.1%
3.9%
3.1%
2.7%
2.1%
2.9%
0%
1%
2%
3%
4%
5%
6%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Central Government Deficit As Percentage of GDP
2016
def
icit
cei
lin
g
The poverty rate among children is relatively high
20 Source: NII, based on Income Surveys for 2002-2011 and Household Expenditure Survey for 2012-2014
18.1% 19.3%
20.3% 20.6% 20.0% 19.9% 19.9%
20.5% 19.8% 19.9% 19.4%
18.6% 18.8%
21.0%
22.4% 23.6%
24.7% 24.5% 23.8% 23.7%
25.0% 24.4% 24.8%
23.5%
21.8% 22.0%
29.6% 30.8%
33.2%
35.8% 34.3% 34.2% 34.0%
36.3% 35.3% 35.6%
33.7%
30.8% 31.0%
15%
20%
25%
30%
35%
40%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Poverty Rates
Children
Individual
Households
The gross inequality in Israel, in contrast to the developments in the OECD
countries, has been on a declining trend since the beginning of the millennium.
Yet, until recently, the net inequality has increased faster than in the OECD.
22 Source: SWIID, NII, OECD, Chief Economist Department Calculations
25
27
29
31
33
35
37
39
The Gini Coefficient of Economic Inequality
40
42
44
46
48
50
52
54Gross income Net income
The productivity gap between Israel and the US has widened
significantly between 2000-2010
23
Source: OECD.
67.2
56.1
49.3
38.1
0
10
20
30
40
50
60
70
80
90
100GDP per Hour Worked
USD, Current Prices, Current PPPs, 2014
50%
60%
70%
80%
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2002
2004
2006
2008
2010
2012
2014
GDP per Hour Worked in Israel as % of the US
• Recent Developments
• Economic Trends
• Growth Potential in the Medium Term
• 2015-2016 Budget Forecasts
Outline
24
The global environment is challenging
25
The main global trends are:
• Changes in China’s growth model
• Slowdown in investments and demographic changes in the developed countries
• A decrease in commodity prices
• Risk of crisis in emerging markets (Brazil, Russia) • Slowdown in global trade
• Slowdown in potential growth rates
• Risk of a global crisis • A decline in Israeli exports and expectations for future demand
• Implications for the exports of services
• More competition
The globalization process is in a gradual decline
since the early 2000s
26
0
0.5
1
1.5
2
2.5
3
1961-1965 1966-1970 1971-1975 1976-1980 1981-1985 1986-1990 1991-1995 1996-2000 2001-2005 2006-2010 2011-2014
Global trade elasticity Israeli exports elasticity
Risks are shifting to the emerging markets
0
100
200
300
400
500
600
700
CDS 5Y Brazil
Russia
Turkey
Malaysia
Philippines
China
Israel
Germany
Structural risks:
• Additional downturn in exports of developing countries
• Weaker commodity prices (risk to commodity-exporting countries)
• Restructuring in China
Risks arising from business cycle fluctuations:
• Reversal of foreign capital inflows
• Possibility of a financial crisis and a burst of an asset price bubble
Geopolitical events affect consumption, security expenditure and trade
27
Economic trends in Israel
28
Structural changes
Cyclical changes
Fiscal policy and taxation
Volatility of investments
High-Tech growth slows
Improvement in the labor market Challenges to competitiveness
Challenging global environment
Change in growth composition
Inflation and reduction in the cost of living
Social inequality
1.8%
1.2%
0.4%
3.0%
4.0%
Demographic change expected to affect labor supply growth and productivity
Source: CBS, with adjustments due to immigration data. 29
80.3%
62.5% 57.8%
Israel - totalpopulation
Ultra-orthodox Arabs
Population growth, 2014-2019 Participation rates Working age, 2014
Working age
Competitiveness of the business sector is weakening
Source: CBS, BIS
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
*
-6%
-4%
-2%
0%
2%
4%
6%
Current account surplus Percent of GDP
80859095
100105110115120 Real effective exchange rate (100=2010, ILS)
Increase means appreciation
Factors effecting competitiveness:
• Currency appreciation
• Labor supply – Minimum wage hike – Public sector wage increases – Lower skilled workforce – Supply constraint in high-tech – Lower labor costs in the developed
economies
• Protectionism policies in the world
30
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
40
90
140
190
240
290
340
390
The high-tech sector has become a large and developed sector. Future growth is constrained by labor supply
Source: CBS
High-tech employees, as % of business sector employment
(RHS)
High-tech employees (LHS)
31
0%
1%
2%
3%
4%
5%
6%
7%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Percent of GDP
Machinery and equipment + ships and aircrafts Intellectual property products
Residential buildings Land transport equipment
Non-residential building
Volatility of investments due to one-time projects and uncertainty in
some sectors
32 Source: CBS
Upgrades in the Intel plant and developments in the building sector are expected to support investment in next two years
0.6%
0.3%
0.1%
0.1%
0.0% 0.0% 0.0%
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
0.7%
2013 2014 2015 2016 2017 2018 2019
Contribution to GDP growth
Gas Production contribution to growth is diminishing
33 The 2015-2016 estimates are based on the production forecasts by the Gas Authority
Effects on growth: 0.3 percentage points in 2014 0.1 percentage points in 2015
Effects on state revenues: Sheshinski tax - no revenues during the current budget period Royalties (billions of shekels) Corporate tax (hundreds of millions)
Deleveraging in the economy stems from a reduced public debt and a
decline in business credit
34 Source: BoI, CBS
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%Credit composition
Percent GDP
business sectorhouseholdshousing loansgovernment and municipal authorities 150%
160%
170%
180%
190%
200%
210%
220%Total credit Percent GDP
Lower oil prices contribute to the Israeli economy
35
Source: Jiménez-Rodríguez and Marcelo Sánchez (2004 ) , CBS, EIA.
The coefficient for Israel was calculated in the Chief Economist Dept. using similar methodology
0.38
0.18 0.17 0.15
0.13 0.12
0.08
0
0.1
0.2
0.3
0.4
Effect of a 10% decrease in oil prices on growth Cumulative effect after 6 quarters
Terms of trade index
(average, 100=2014)
WTI crude oil price
0
20
40
60
80
100
120
140
80
85
90
95
100
105
110
115
120
2008 2009 2010 2011 2012 2013 2014 2015
Price for barrel (USD)
Terms of trade
Oil price and terms of trade index
A decline in the tax burden and in public spending, increased stability in recent years
Source: Ministry of Finance - The Chief Economist Dept. calculations
25%
30%
35%
40%
45%
50%
55%
Tax burden Gross government spending
36
• Recent Developments
• Economic Trends
• Growth Potential in the Medium Term
Outline
37
Change in Growth Environment
38 Source: CBS.
2.8%
-5%
0%
5%
10%
15%
20%
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
4.3%
10.2%
3.7%
In recent years there has been a decline in the growth rates to below 3 percent, compared with significantly higher rates of growth in recent decades
New Normal?
The new growth environment
39
Average Rates of Change: Effect on Growth
2011-1992 2012-2015
Labor Supply (thousands of hours) + 3.4% 2.3%
Income Tax Burden (percent of GDP) - -0.4% 0.8%
Defense Consumption - -3.8% 1.5%
R&D Capital Stock + 6.0% 3.0%
Ratio of GDP per capita (Israel to US) - 59.7% 63.8%
Average Growth Rate 4.3% 2.8%
Demography
Fiscal Policy
Technological
Change
Convergence
• Recent Developments
• Economic Trends
• Growth Potential in the Medium Term
• 2015-2016 Budget Forecasts
Outline
40
2.9%
-2.8%
2.5% 1.6% 2.2% 1.5%
2.4% 2.5% 2.6% 2.6%
6.91%
-10.3%
12.5%
6.7%
2.9% 3.3% 3.4% 2.6%
3.4% 4.1%
-15%
-10%
-5%
0%
5%
10%
15%
Average95-08
2009 2010 2011 2012 2013 2014 2015 2016 2017
US GDP World Trade
In recent years there has been a continuous downward trend in world-trade forecasts
41 Source: IMF,BEA.
U.S. GDP and World Trade annual growth rate %
The Macroeconomic Forecast for 2015-2016 Budget
42
* Growth excluding gas contribution in parentheses.
** For years 2007-2013. The forecast was made in September, 2015.
Indicator Average 2004-2013
2013 2014 2015
2016 Budget
GDP* 4.3% 3.3% (2.6%)
2.6% (2.3%)
2.6% (2.5%)
2.9% (2.8%)
Private Consumption 3.9% 3.9% 3.7% 4.7% 3.0%
Government Consumption
2.4% 4.0% 3.3% 3.0% 2.9%
GDFC 6.0% 1.7% 1.0% 1.1% 1.8%
Fixed Investment 5.5% 3.6% -2.0% -1.4% 3.8%
Exports 5.6% 0.1% 1.5% -2.5% 4.2%
Exports of goods, excluding diamonds
4.8%** -2.6% 3.3% -0.3% 3.7%
Exports of services 6.6%** 2.7% 1.4% -2.2% 5.0%
Imports 4.6% 0.5% 3.0% 0.5% 3.9%
Unemployment 8.5% 6.2% 5.9% 5.3% 5.1%
Growth Forecasts: Comparison
43
Updated 2016 2015
September 2015 2.9 2.6 Ministry of Finance
December 2015 2.8 2.4 Bank of Israel
October 2015 3.3 2.5 IMF
October 2015 3.5 2.5 OECD
Summary
44
• Israel faced a slowdown in the real GDP growth in recent years, due to a decline in the contribution of investments and exports to the growth rate.
• In 2015, the employment rate leveled at a high rate due to supply constraints, which creates upward pressures on the real wages. In the baseline scenario, employment continues to reflect levels close to full employment
• Despite low interest rates, inflation is still negative due to the decline in the commodities prices and intended government policy. Inflation is expected to turn to positive during 2016, still at a lower pace than the middle of the target band
• Israel has three main demographic groups with large socio-economic gaps between them. The net inequality in Israel is high in international comparison, despite the decline in gross inequality in recent years, which reached the OECD average.
• The productivity gap between Israel and the OECD widened significantly between 2000-2010.
• The global environment presents challenges and risks, mainly to the exports • Structural changes in the economy affect the potential rate of growth in the middle term
(around 3%) • GDP growth and its composition were similar to the 2015-2016 forecast. The growth rates
for 2015 and 2016 were projected to be close to potential
