The Israeli Economy: Current Trends,

Strength and Challenges

Jerusalem Press Club

Dr. Karnit Flug

Governor of the Bank of Israel
05.02.2017

1
 GDP per capita Growth Rates

GDP per capita annual % change (2000-2016)

8

4 Israel
Developing
2
Economies
0 Advanced
Economies
-2

-4

-6

*Advanced economies: Simple average for 21 rich OECD countries

**Developing economies: IMF “emerging markets” definition

2 Source : IMF
 Israel’s Exports and the World Trade

Goods and Services exports in Israel & OECD and the world trade, 2015-2016
Index, Q1-2007=100
‫מדד‬ ‫מדד‬ ‫מדד‬
170 Services 170
170 Goods & Services Goods

160 160 160

150 150 Israel 150

Israel 140 140 USA

140
Israel
130 130 130

120
USA 120
120

110 110 OECD* 110

World Trade OECD*

100 100 100

90 90 90

80 80 80

3 Source: CBS, OECD ,IMF

 Geographical composition of Israel’s Exports

Geographical composition Geographical composition

of Israel’s Exports of goods of Israel’s Exports of
excluding diamonds, 2015 Business services, 2014

Other Other Europe

Europe
23% 29% 34%
29%

Asia Asia 6% USA

USA
25% 24% 31%

4 Sources: CBS
 Labor Market
Quarterly, 1995-2016, 25-64

%
%
82
12.5 80.0
80
11.5 Participation Rate
76.9 78
10.5
76
9.5
Employment rate
74
8.5
72
7.5 Unemployment rate

6.5 70

5.5 68

4.5 66
3.8
3.5 64

5 Source : Central Bureau of Statistics Labor Force Survey

6
10
15
20
25

0
5
%
Korea
Iceland
Japan
Mexico
Norway
Switzerland
United Kingdom

Source: OECD and BoI

New Zealand
United States
Germany
Israel
Czech Republic
Australia
Austria
Chile
Denmark
Estonia
Sweden
Luxembourg
Canada
Hungary
Netherlands
Poland
OECD
Unemployment Rate, 25-64, 2015

Belgium
Finland
Slovenia
Ireland
Turkey
France
Latvia
Italy
Slovak Republic
Portugal
Spain
Greece
 Real Wage per Employee Post*
1995-2016

Last 12-month
NIS
percent change
10,000
3.7% Business Sector

9,500
3.1% Total

2.2% Public Sector

9,000

8,500

8,000

7,500

*Seasonally adjusted, 12 months moving average, 2015 prices

7 Source : Central Bureau of Statistics Data

 The Financial System Structure

Distribution of Credit for Non-Financial

Private Sector, by Lender
2000 2016
1% 1%
9% 8%

0% 13% 13%
2% 2%
13%
63%
75%

Banks Institutional Inverstors

Credit card companies Foreign residents
Government Households & others
*Without credit to the government
8 Source: BoI
 The Financial System Structure

Distribution of the Public’s Assets

Portfolio
2000 2016

Banks

25% Current
21% 24%
38%
Account
7%
Institutional
36% 1% Investors
48%
Other

*Other includes mostly cash, stocks and bonds held directly by the public
9 Source: BOI
 The Financial Reforms on the Agenda

 Separation of credit card companies from banks

 Reducing entry barriers for new banks and other credit providers

 Establishing a Credit Registry and credit bureaus

 Increasing competition in the Payment Services

 Setting up the Financial Stability Committee will help coordinate

among regulators, monitor risks and address them early

10
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.

12
 Actual Inflation and Inflation Expectations &
Forecast, 2006-2018
%
Research
7 Division
Forecast
6

4 Expectations Forward*
3

-1 Inflation 12 month
-2

* Forward inflation expectations 3-5 years

13 Source: Bol
14
3.2
3.6
3.8
4.0
4.2
4.4
4.6
4.8
5.0
5.2

3.4
NIS
01/12
03/12
05/12
07/12

Source : BoI
09/12
11/12
01/13
2012-2016

03/13
05/13
07/13
09/13
11/13
Exchange Rates

01/14
03/14
05/14
07/14
Nominal Effective

09/14
11/14
01/15
€/₪

03/15
05/15
07/15
09/15
$/₪

11/15
01/16
03/16
05/16
07/16
09/16
11/16
70
75
80
85
90
95
Index

100
110

105
 Survey of Home Price and Loans for Residential Purposes
2005-2016, Monthly

Index
220
Survey of
200 home prices
180

160

140
Loans for residential
120 purposes

100

80
09/05

03/06

09/06

03/07

09/07

03/08

09/08

03/09

09/09

03/10

09/10

03/12

09/12

03/13

09/13

03/14

09/14

03/15

09/15

03/16

09/16
03/11

09/11

15 Source : BoI, Banking Supervision Department

 Bank of Israel Policy Tools
2007-2016
5 Bond “The Monetary Committee
Purchases assesses that monetary policy
4 will remain accommodative for
18 Billion NIS
Interest 3 a considerable time”
2
Rate 1 0.1
(%) 0
01/07

06/07

11/07

04/08

09/08

02/09

07/09

12/09

05/10

10/10

03/11

08/11

01/12

06/12

11/12

04/13

09/13

02/14

07/14

12/14

05/15

10/15

03/16

08/16
Intervention
3,000 Building reserves Natural Gas Purchase program
2,500 + Intervention
2,000
FX 1,500
1,000
Intervention 500
(US$) 0
01/07

06/07

11/07

04/08

09/08

02/09

07/09

12/09

05/10

10/10

03/11

08/11

01/12

06/12

11/12

04/13

09/13

02/14

07/14

12/14

05/15

10/15

03/16
Higher
Additional Higher PTI
capital Variable
provision LTV capital limit and Higher
requireme Interest
for high LTV limit requirements capital capital
nts for Rate
Macroprudential loans
high LTV limit
for high LTV requirem
ent
requirements

03/23
Measures
07/09
10/95 02/82
06/68
10/54
01/41
05/27
09/13
01/00
01/07

06/07

11/07

04/08

09/08

02/09

07/09

12/09

05/10

10/10

03/11

08/11

01/12

06/12

11/12

04/13

09/13

02/14

07/14

12/14

05/15

10/15

03/16
16 Source : Bol
Fiscal Policy
 Budget Deficit* and Deficit Target
(Percent of GDP, 2000-2016)

6
%

New Budget
4 Target
2.9 2.9
3

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

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

18 Source : Bol
 Public Debt in Israel is Decreasing but Net Interest
Payments are Still High in International Comparison
General government net debt interest payments
Per cent of nominal GDP 2016
4.0
2.8

2.0 1.4

0.0
%

Norway
Korea
Sweden
Luxembourg
Estonia
Finland
Switzerland
Japan
Australia
New zealand
Denmark
Netherlands
Czech Republic
Canada
Germany
Slovak Republic
OECD
Poland
Austria
France
United Kingdom
Ireland
Spain
Belgium
Slovenia
Israel
United States
Greece
Hungary
Iceland
Italy
Portugal
100 Public Debt - Israel
-2.0

-4.0
90

80

70

60

50

40
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

19 Source : Bol and the OECD.

 Tax Burden
2015, Percent of GDP

%
50
45
40
34.3
35 31.4
30
25
20
15
10
5
0

20 Source: OECD Revenue Statistics 2015

 Public Expenditure
Percent of GDP, 2016

%
60

55

50
46.1
45

40 38.2
35

30

25

20

15

21 Source : OECD
 Civilian Public Expenditure Excluding Interest
Percent of GDP, 2015

%
60.0
55.0
50.0
45.0 41.8
40.0
35.0
29.8
30.0
25.0
20.0
15.0

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

22 Source :OECD and the Bol

The Strengths Behind Israel’s
Economy
 Share of the Population Aged 25-64 with
Tertiary-Level Education , 2015
%
60

50

40

30

20

10

24 Source : OECD Education at a Glance 2015

 Israel is Leading in International Innovation
Rankings

Index

Ranking 10 2

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

25 Source: World Economic Forum 2016-2017 & Bloomberg Innovation Report 2015
 Israel’s Relative Advantages - Technology

• 73 Israeli companies are listed on Nasdaq

• Over 300 international companies established Israeli R&D centers

• More than 5,000 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).

26 Source: Israel Innovation Authority, Nasdaq, The National Cyber Bureau

 Triadic Patent Families
Number per million inhabitants, 2013

125 148
80.0

70.0

60.0

50.0

40.0

30.0

20.0

10.0

0.0

27 Source: OECD
 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 86%.

• 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.

28 Source: Israeli Water Authority , “Natafim”, “Mekorot”.

 Share of Total ICT Gross Value Added out of GDP, 2013

29 Source: CBS & Eurostat

30
0.00%
0.10%
0.15%
0.20%
0.25%
0.35%
0.40%
0.45%

0.05%
0.30%
Greece
Italy
Poland
Czech Republic

Source : OECD
Slovak Republic
Slovenia
Spain
Australia
Austria
Estonia
Germany
New Zealand
Denmark
Netherlands

Later stage venture

Belgium
Portugal
France
Hungary
Norway
Switzerland
United Kingdom
Japan
Ireland
OECD
Seed/start-up/early stage

Finland
Korea
Sweden
Venture Capital Investment as % of GDP, 2014

Canada
United States
Israel
 Flurry of High Tech Entrepreneurship: Taste for Risk
Number of New Start-Ups by Year 1999-2014

Israeli Startup Companies: Number of Companies Established

by Year and Success Index
1999-2014
8
Average:
640 new startups per year! 8
22

34 24 20
67 2
30 787
69 44
129 32
37 282 348 596
102 446 788
186 235 296
17 194
29
37 148 643
90 77
424 474
342 379 328
306 319 292
260 246 246 242 210
202
83
5
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Failed Running Successful

31 Source: IVC
Yet, There Are Challenges
 Output Per Hour Worked
1995-2015,$ PPP, 2015 Constant Prices

$
70
21 Rich
60 Countries

50 OECD

40
Israel

30

20

10

33 Source : The Conference Board Total Economy Database 2015

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

Productivity Ratio
1.2
Electrical & optical
equipment Chemicals
1.1 Real estate, renting and
business activities Transport, storage and Transport equipment
communications
1.0
Financial intermediation
0.9 non-metallic mineral
products
Wholesale and retail Rubber and plastics
0.8 trade products Machinery and equipment
Basic metals and fabricated
0.7 Hotels and restaurants metal products
Construction Food products, beverages Textiles, leather and
and tobacco footwear
0.6 Wood and products of
wood and cork
0.5
Agriculture,
Pulp, paper, paper forestry and fishing
0.4
products, printing and
publishing
0.3

0.2
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9
Exports as share of the industry’s output

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

 35
$

10
12
14
16
18
20
0
100,000
200,000
300,000
400,000
500,000
600,000
Australia Mexico
Netherlands Poland
Ireland Chile
Turkey
Canada New Zealand
Austria Israel
Switzerland Slovakia
UK Estonia
Finland Hungary
New Zealand Japan
USA Canada
Iceland
Japan Australia
Slovenia Czech Republic
Denmark OECD
Korea Slovenia
Poland United States
Germany

2014
France Sweden
Slovakia Switzerland
Italy United Kingdom
Sweden Latvia
Germany Denmark
Portugal Finland
2014, 2011 prices, $PPP

Mexico Netherlands
Austria

Source: BoI ,RAMA ,Doing Business

Spain Luxembourg
Belgium France
Chile Portugal
Norway Belgium

OECD Trade Facilitation Indicators

Luxemburg Norway
Czech Republic Spain
Estonia Greece
Capital per employee in the business sector

Turkey Ireland
Italy
Hungary
Israel
Greece
265
270
275
280
285
290
295
300

67
72
77
82
87
92

New Zealand
Denmark
Facilitation & Capital Stock

Korea
Norway
United Kingdom
United States
Sweden
Estonia
Finland
Latvia
Australia
Germany
Ireland
Austria
Iceland
Canada
Poland
Portugal
Czech Republic
Aged 15+, 2015

Netherlands
France
Slovenia
Doing Business 2017

Switzerland
Spain
Distance to Frontier (0-100)

Slovak Republic
Factors: Regulation, Human Capital & Trade

Japan
The Productivity Gap is the Result of Various

Hungary
environment scale, PIAAC survey

Belgium
Problems-solving in technology-rich

Mexico
Italy
Israel
Chile
score
Israel’s

Luxembourg
Greece
Turkey
 Employment Rate by Population Groups

% Women Employment Rate, 25-64 % Men Employment Rate, 25-64

100 100

90 90
Jewish Non-Ultraorthodox Women Jewish Non-Ultraorthodox Men
80
80
OECD Men
70 OECD Women 70
60 Arab Men
60
50 Ultraorthodox Women
50
40
40 Ultraorthodox Men
30

Arab Women 30
20

10 20

0 10

36 Source : Based on Central Bureau of Statistics Data

37
0.1
0.2
0.3
0.4
0.5
0.6

0
Iceland
Norway
Denmark
Slovenia
Finland
Cezch Republic
Belgium
Slovak Republic
Austria
Luxemburg
Sweden

Source: OECD
Nethelands
Hungary
Germany
France
Switzerland
Poland
Korea
Ireland
OECD
Canada
Italy
Japan
Israel 2015

New Zealand
and transfers

Australia
Portugal
Greece
Gini Index, 2014, at

Spain
Latvia
Unitred Kingdom
Estonia
disposable income, post taxes

Israel
Turkey
United States
Mexico
Chile
10
12
14
16
18
20

0
2
4
6
8

Iceland
Denmark
Cezch Republic
Finland
Norway
France
Slovak Republic
Luxemburg
Nethelands
Switzerland
Sweden
Ireland
Austria
Germany
Slovenia
New Zealand
Belgium
Hungary
United Kingdom
Poland
OECD
Israel 2015

Canada
Australia
Italy
Portugal
Poverty rate, 2014

Latvia
Korea
Greece
Spain
High Poverty rate and Income Inequality

Japan
Estonia
Mexico
Chile
Turkey
United States
Israel 2015
 To Sum Up

The Israeli Economy has a great potential, but while part of the
economy utilizes its strengths and resources, inclusive growth of
the economy as a whole requires a comprehensive and persistent
policy.
The main pillars of such policy should address economic inequality,
inefficient regulation and the need to increase both investment and
human capital.

38
Thank You