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Economic Trends in Israel. General data Product and employment Balance of payments and external stability Fiscal policy Monetary policy and inflation rate. Economic Trends in Israel. General data Product and employment Balance of payments and external stability Fiscal policy

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economic trends in israel
Economic Trends in Israel
  • General data
  • Product and employment
  • Balance of payments and external stability
  • Fiscal policy
  • Monetary policy and inflation rate
economic trends in israel2
Economic Trends in Israel
  • General data
  • Product and employment
  • Balance of payments and external stability
  • Fiscal policy
  • Monetary policy and inflation rate
general data
General data
  • Level of technology
  • Level of education
general data4
General data
  • Level of technology
  • Level of education
expenditure on civilian r d as percent of the gdp in israel and in oecd countries 2001
Expenditure on Civilian R&D as percent of the GDP in Israel and in OECD Countries, 2001

Israel is a leader in technology fields and ranks first in the percent of its GDP that it invests in R&D.

ict product out of total business sector product 1997
ICT Product out of total business sector product, 1997

Israel ranks first in its proportion of ICT production in total business sector product.

general data7
General data
  • Level of technology
  • Level of education
percent of population with 12 or more years of schooling ages 25 64 1999
Percent of population with 12 or more years of schooling, ages 25-64, 1999

One measure of the country’s level of education is the percent of its population that has at least twelve years of schooling. By this measure, Israel ranks rather high by international standards.

economic trends in israel9
Economic Trends in Israel
  • General data
  • Product and employment
  • Balance of payments and external stability
  • Fiscal policy
  • Monetary policy and inflation rate
product and employment
Product and Employment
  • Domestic growth rate
  • GDP Per-capita – international comparison
  • Factors affecting growth
  • Characteristics of growth
  • Unemployment and the labor market
product and employment11
Product and Employment
  • Domestic growth rate
  • GDP Per-capita – international comparison
  • Factors affecting growth
  • Characteristics of growth
  • Unemployment and the labor market
gdp growth qoq at annual rate
GDP GrowthQoQ,at annual rate

The growth rate is expressed as the rate of quarter-on-quarter change in annual terms. In 1999–2000, Israel had a very vigorous growth rate relative to the economy’s past performance and by international standards. Since October 2000, the growth rate has been declining due to the global economic slowdown, which has dampened demand for the high-tech products on which the Israeli economy relies. the decline on the Nasdaq index, which reduced investments in Israeli start-up companies and in high-tech industry at large, and due to the adverse effects of Palestinian terrorism on tourism, construction, agriculture, and exports to the Palestinian Authority areas. The tight monetary policy has been an additional impediment to growth. In 2002, a slump in private consumption caused the negative effects to spread to a larger number of industries. The growth rate in the first quarter of 2003 is mainly a reflection of an upturn in exports and a downturn in imports. The reversal of this trend in the second quarter contributed to the contraction of GDP that occurred then.

gdp person growth annual percent change
GDP/Person Growthannual percent change

Average 1987-2000: 2.0%

Average 2001 - 2003: -2.3%

GDP per capita is an indication of a country’s standard of living. Israel’s per-capita GDP declined in 2001-2003 by 7% in cumulative terms. This is an unprecedented decline in the standard of living. A modest increase in GDP per person is projected for 2004, the first year after three consecutive years of decline.

product and employment14
Product and Employment
  • Domestic growth rate
  • GDP per-capita – international comparison
  • Factors affecting growth
  • Characteristics of growth
  • Unemployment and the labor market
gdp person ppp adjusted index usa 100 2001
GDP/person (PPP-adjusted), index (USA = 100), 2001

In 2001, per-capita GDP was lower in Israel than in the U.S. and most Western European countries, but higher than in many OECD countries. Israel’s per-capita GDP in 2001 was 75% of the OECD average and 59% of the U.S. level.

product and employment16
Product and Employment
  • Domestic growth rate
  • GDP Per-capita – international comparison
  • Factors affecting growth
  • Characteristics of growth
  • Unemployment and the labor market
the u s economy 1995 2002 real growth rates of gdp and business investment
The U.S. Economy, 1995-2002real growth rates of GDP and business investment

The domestic slowdown in 2001 and 2002 was affected by the growth slowdown in the U.S. and by the composition of the GDP decline there. In the main, a downturn in investments by American firms led to a decrease in demand for Israeli exports, which are heavily tilted in the direction of these products. American corporate investments increased in the second quarter of 2003, although more slowly than GDP.

world growth weighted average us 44 euro area 37 japan 4 uk 8 asian nies 7
World Growth(weighted average: US - 44%, Euro area - 37%, Japan - 4%, UK - 8%, Asian NIEs - 7%)

The slowdown in Israeli exports was influenced by the slump in global growth. The growth rate of global GDP was calculated as a weighted average in terms of its share in Israeli exports. Current projections are that the global growth rate will recover in 2004 (relative to 2001 - 2003) but will be lower than in the past.

the nasdaq index and investment of vcs in start ups in the u s and in israel
The Nasdaq Index and Investment of VCs in Start Ups in the U.S. and in Israel

The steep decline in the Nasdaq index in 2000–2002 had a severe downward effect on capital raised by VC funds. This, in turn, dampened investments in Israeli and American start-up companies. The decline accounts for much of the blow inflicted on high-tech and the domestic economic slowdown that began in late 2000. The Nasdaq index recovered somewhat in the first half of 2003, although it is lower than in the past.

tourist arrivals thousands per month
Tourist Arrivalsthousands per month

The global and domestic security situation has depressed Israel’s number of inbound tourists by some 55% relative to the early-2000 level. The share of tourism in GDP has fallen from more than 3% before the beginning of the Intifada to about 1% of GDP today. Tourism has recovered in the past few months, due to some improvement in the security climate and the effects of the end of the war in Iraq. However, the level of tourism is still lower than that preceding the eruption of Palestinian terror offensive.

person nights at hotels thousands per month
Person-Nights at Hotelsthousands per month

The adverse effects on tourism were eased somewhat by promotions that aimed to encourage Israeli tourists to replace foreign ones.

the short term real interest rate derived from the bank of israel s key lending rate
The Short-Term Real Interest Rate(Derived from the Bank of Israel’s key lending rate)*

* Discount Rate Deflated by Implicit Inflation Expectations

Contractionary monetary interest rates in 2001–2003 contributed to the deceleration of GDP growth and delayed recovery from the recession.

product and employment23
Product and Employment
  • Domestic growth rate
  • GDP Per-capita – international comparison
  • Factors affecting growth
  • Characteristics of growth
  • Unemployment and the labor market
industrial production index
Industrial Production Index

The slowdown is reflected in a decline in industrial production from late 2000 to the end of 2001. In 2002 and in the first half of 2003 industrial production has been stable at the new low level.

private consumption expenditure
Private consumption expenditure

In 2001, despite the economic slowdown, private consumption increased in absolute terms and as a share of GDP. In 2002, private consumption declined moderately as the duration of the recession prompted households to adjust their estimates of permanent income downward. This trend continued and accelerated in the first quarter of 2003. In the second quarter, due to the temporary improvement in the security situation and the optimism that followed the end of the war in Iraq, private consumption increased impressively.

commerce and services sectors real monthly revenue
Commerce and Services Sectorsreal monthly revenue

Monthly revenues in trade and services declined in 2002 and in the first half of 2003 after recording no change in 2000 and 2001. These developments reflect an adjustment to changes in private consumption.

gross capital formation nis millions 2000 prices
Gross capital formation (NIS millions, 2000 prices)

Fixed investment decreased by 9 percent in 2002 after a 5 percent decline in 2001. Most industries in the business sector participated in the decline, which reflects security and economic uncertainty, the global economic slump, and domestic monetary restraint.

housing starts and fixed investment in residential construction
Housing Starts and Fixed Investmentin residential construction

Housing starts attest to the trend of future activity, since homebuilding lasts about a year and a half. Housing starts declined from mid-2000 until the first quarter of 2003, and then increased slightly in the second quarter.

real change in domestic demand excl defense imports
Real Change in Domestic Demand (excl. defense imports)

Domestic demand (excl. defense imports) decreased by 1.0 percent in 2002 after rising by 1.4 percent in 2001. Domestic demand is expected to decline by about 1.3 percent in 2003 and to increase by 2.6 percent in 2004 (composed of a 1.2 percent increase in private consumption, a 1.8 percent upturn in fixed investment, and a 2.9 percent decline in public consumption).

structure of industrial exports
Structure of Industrial Exports

23%

24%

26%

26%

35%

77%

76%

74%

74%

65%

*Jan-Aug at annual rate

The recession is also reflected in a decline in exports since 2000. In 2002, exports of traditional industries did not decline. However, high-tech exports decreased both in absolute terms and in percent of GDP. There was a moderate recovery in the first eight months of 2003 relative to the 2002 average, reflecting the effect of the real currency depreciation against the currency “basket,” the effect of the decline in real wages, and efficiency gains in the business sector.

net inflows of foreign investment us billions
Net Inflows of ForeignInvestmentUS $ billions

Due to the global economic slowdown, the Nasdaq crisis, and the security situation, net foreign investment (direct investments in Israeli enterprises, portfolio investments, and other) declined from $11.7 billion in 2000 to $2.0 billion in annual terms in the first seven months of 2003, and net direct investment in Israeli enterprises (FDI) declined from $5.0 billion in 2000 to about $1.6 billion 2002 but increased in the first seven months of 2003 to $3.5 billion in annual terms.

product and employment32
Product and Employment
  • Domestic growth rate
  • GDP Per-capita – international comparison
  • Factors affecting growth
  • Characteristics of growth
  • Unemployment and the labor market
employee posts and the unemployment rate
Employee Posts and the Unemployment Rate

The recession in 2001–2002 is also manifested in an increase in the unemployment rate, from 8.8% in the second half of 2000 to 10.6% in the second quarter of 2003. The unemployment rate depends on the growth rate, wage developments, the number of non-Israeli workers, and Government’s labor and transfer-payment policy.

non israelis employed in the business sector percent of total employees
Non-Israelis employed in the Business SectorPercent of total employees

Non-Israelis (Palestinians and foreign workers) account for 14% of persons employed in the domestic business sector. The proportion has been rising gradually since the early 1990s, partly due to the replacement of Palestinian workers in response to security quarantines. Israel ranks second in the world in the share of foreign workers in its employed labor force (after Switzerland, where the unemployment rate is very low). The number of foreign workers is having a serious effect on unemployment and on inequality in income distribution.

real wages cpi adjusted index 1999 100
Real wages (CPI-adjusted)index (1999=100)

The economic slowdown was reflected in a decline in average real wages in the business sector and the public sector in the first six months of 2003 relative to 2002, following a sharp decline in 2002.

israeli and non israeli employees in construction thousands
Israeli and Non-Israeli Employees in Constructionthousands

The issue of substitution between Israeli and non-Israeli workers is reflected in the construction industry, where the advent of foreign workers has pushed wages down, made construction work less attractive to Israeli workers, and lowered the number of Israelis in the industry. In 2001 and 2002, employment of Israelis in construction increased somewhat even though the construction industry was mired in a severe recession. This is due to a decline in the Palestinian labor force after the onset of the terror attacks and the decline in the number of foreign workers during 2002.

participation rate of men ages 25 54 2000
Participation rate of Men ages 25-54, 2000

One reason for the lower standard of living in Israel than in Western Europe and the U.S. is that Israel has a low labor-force participation rate, especially among men. This is due to a low participation rate among the ultra-Orthodox, to the large population of foreign workers who depress wage levels in industries such as construction and agriculture, making them unattractive to Israelis, and to the level of transfer payments.

economic trends in israel38
Economic Trends in Israel
  • General data
  • Product and employment
  • Balance of payments and external stability
  • Fiscal policy
  • Monetary policy and inflation rate
balance of payments and external stability
Balance of Payments and External Stability
  • Balance-of-payments
  • Foreign reserves
  • External Debt
balance of payments and external stability40
Balance of Payments and External Stability
  • Balance-of-payments
  • Foreign reserves
  • External Debt
the current account millions of dollars percent of gdp
The Current Accountmillions of dollars & percent of GDP

The current account of the balance of payments is the net balance of total export receipts less total payments for imports of goods, services, and factors, and unilateral transfers (including the American grant in aid). This is the most important indicator of the state of the economy vis-a-vis the rest of the world in terms of imports and exports. The current-account deficit in the past 12 months (ending in March 2003) has been 0.5% of GDP. This is lower than the 6% level observed in the mid-1990s and is low by international standards, indicating that the balance of payments does not pose a threat to the Israeli economy.

balance of payments and external stability42
Balance of Payments and External Stability
  • Balance-of-payments
  • Foreign reserves
  • External Debt
external reserves
External Reserves

The reserves include foreign currency held by the Bank of Israel in short-term accounts abroad (mainly U.S. Treasury bills). Israel’s reserves are high both by international standards and in terms of months of imports. This assures Israel’s ability to finance its liabilities in the short term and to meet its import needs, and it corroborates the assessment of the low probability of a balance-of-payments crisis.

balance of payments and external stability44
Balance of Payments and External Stability
  • Balance-of-payments
  • Foreign reserves
  • External Debt
external debt gross and net percent of gdp end period
External Debt, Gross and Net(percent of GDP, end-period)

Israel’s net external debt (total debt liabilities less debt assets) was 0.6% of GDP at the end of December 2002. This is a lower level than in the past, giving further evidence of the improbability of a balance-of-payments crisis.

economic trends in israel46
Economic Trends in Israel
  • General data
  • Product and employment
  • Balance of payments and external stability
  • Fiscal policy
  • Monetary policy and inflation rate
fiscal policy
Fiscal Policy
  • Public expenditure
  • Analysis of Changes in the Components of Public Expenditure
  • Public expenditure – international comparison
  • Budget deficit
  • Public debt and government debt
  • Public debt – international comparison
  • Tax burden
  • Tax reform
fiscal policy48
Fiscal Policy
  • Public expenditure
  • Analysis of Changes in the Components of Public Expenditure
  • Public expenditure – international comparison
  • Budget deficit
  • Public debt and government debt
  • Public debt – international comparison
  • Tax burden
  • Tax reform
general government expenditure as percent of gdp
General Government Expenditure(as percent of GDP)

Government expenditure as a share of GDP increased in 2001 and 2002 due to the recession (which reduced GDP) and the need to increase the defense budget despite cutbacks in other public expenditure.

fiscal policy50
Fiscal Policy
  • Public expenditure
  • Analysis of Changes in the Components of Public Expenditure
  • Public expenditure – international comparison
  • Budget deficit
  • Public debt and government debt
  • Public debt – international comparison
  • Tax burden
  • Tax reform
the real change in general government expenditure
The Real Change in General Government Expenditure*

* Nominal change deflated by business-sector GDP deflator

Real public expenditure increased by 2.7 percent in 2002 after rising by 5.5 percent in 2001 and by 2.6 percent on annual average in 1996–2000. The relatively mild upturn in total public expenditure despite the rapid increase in public consumption is partly explained by restraint in expenditure for transfer payments to households, which blunted the rapid escalation of public expenditure.

slide52
The Real Change in General Government Expenditureon consumption, support payments, and current transfers*

* Nominal change deflated by business-sector GDP deflator

Public expenditure (excl. defense imports) recorded a significant 4.8 percent increase in 2002, after upturns of 5.1 percent in 2001 and 2.9 percent on annual average in 1996–2000. Most of the increase traces to greater defense outlays, but civilian consumption also rose.

the real change in public consumption expenditure
The Real Change in Public Consumption Expenditure*

*Nominal change deflated by business-sector GDP deflator

Civilian consumption increased perceptibly in 2000 and 2001 and less vigorously in 2002. In contrast, domestic defense consumption leaped in 2002.

the real change in support payments and current transfers
The Real Change in Support Payments and Current Transfers*

* Nominal change deflated by business-sector GDP deflator

Subsidies and transfer payments to households increased considerably in 2000 and 2001. In 2002, subsidies and transfers to households were basically unchanged and other subsidies and transfers decreased sharply.

the change in government sector s real wages and number of employees
The Change in Government Sector's Real Wages* and Number of Employees

* Nominal change deflated by business-sector GDP deflator

General-government employment expanded in 2001 and 2002. In contrast, real wages increased in 2001 but retreated by a similar increment in 2002.

public expenditure current transfers to households as percent of gdp
Public Expenditure & Current Transfers to Households(as percent of GDP)

Since 1990, public expenditure (excl. transfer payments) has declined by 4% of GDP and transfer-payment outlays have risen by 3% of GDP. Israel’s current transfer payments, which are high in historical terms and by international standards, are a disincentive to participating in the labor force

fiscal policy57
Fiscal Policy
  • Public expenditure
  • Analysis of Changes in the Components of Public Expenditure
  • Public expenditure – international comparison
  • Budget deficit
  • Public debt and government debt
  • Public debt – international comparison
  • Tax burden
  • Tax reform
public expenditure as percent of gdp 2001
Public Expenditure,as percent of GDP, 2001

Israel’s level of public expenditure relative to GDP is high by international standards, for reasons that include large defense outlays.

fiscal policy59
Fiscal Policy
  • Public expenditure
  • Analysis of Changes in the Components of Public Expenditure
  • Public expenditure – international comparison
  • Budget deficit
  • Public debt and government debt
  • Public debt – international comparison
  • Tax burden
  • Tax reform
slide60
The Budget Deficitas percent of GDP, includes foreign deficit,excludes net lending and Bank of Israel’s realized profits

The domestic activity recession, coupled with a steep decline in wages and private consumption and a much lower price level than the inflation targets, have caused tax revenues and other government revenues to decline sharply and led to a 2003 budget deficit that is expected to come to 6 percent of GDP. The planned deficit in 2004 will be 4 percent of GDP, 2 percentage points lower than the 2003 level. In 2005–2010, government expenditure in each fiscal year will not surpass expenditure in the preceding fiscal year by no more than 1 percent, and in any case the deficit shall not exceed 3 percent of GDP.

fiscal policy61
Fiscal Policy
  • Public expenditure
  • Analysis of Changes in the Components of Public Expenditure
  • Public expenditure – international comparison
  • Budget deficit
  • Public debt and government debt
  • Public debt – international comparison
  • Tax burden
  • Tax reform
public debt and government debt 1986 2002 percent of gdp
Public Debt and Government Debt 1986-2002(percent of GDP)

Public debt is the result of all public deficits amassed in the past. In the mid-1980s, after the Economic Stabilization Program, public debt as a share of GDP began to decline on a downtrend. In 2000, the public debt was 92% of GDP. Due to the increase in the budget deficit and the decline in GDP, the ratio of public debt to GDP climbed to 97% in 2001 and 105% in 2002.

fiscal policy63
Fiscal Policy
  • Public expenditure
  • Analysis of Changes in the Components of Public Expenditure
  • Public expenditure – international comparison
  • Budget deficit
  • Public debt and government debt
  • Public debt – international comparison
  • Tax burden
  • Tax reform
public debt as percent of gdp
Public Debt as percent of GDP

Israel’s public debt in terms of percent of GDP is larger than that in most OECD countries.

fiscal policy65
Fiscal Policy
  • Public expenditure
  • Analysis of Changes in the Components of Public Expenditure
  • Public expenditure – international comparison
  • Budget deficit
  • Public debt and government debt
  • Public debt – international comparison
  • Tax burden
  • Tax reform
the gross tax burden as percent of gdp
The Gross Tax Burdenas percent of GDP

Includes direct, indirect, and capital taxes, social security and health fees; data before 1995 include an adjustment of 1 percent of GDP to account for a change in definitions.

In 2002, due to the recession, the share of taxes in GDP declined even though the rate of VAT was raised to 18 percent, the income ceiling for National Insurance contributions and health tax was revoked, employers’ indemnification was reduced, and taxes were imposed on fuel, cigarettes, and employer-owned cellular telephones.

fiscal policy67
Fiscal Policy
  • Public expenditure
  • Analysis of Changes in the Components of Public Expenditure
  • Public expenditure – international comparison
  • Budget deficit
  • Public debt and government debt
  • Public debt – international comparison
  • Tax burden
  • Tax reform
marginal tax rate on labor income before and after the tax reform
Marginal tax rate on labor income, before and after the tax reform

Beforetax reform

After tax reform

Monthly income, NIS

Due to the tax reform, the marginal tax rate on labor income (including income tax, National Insurance contributions, and health tax) will fall incrementally from 2003 until the final level of 49% is attained. The March 2003 economic plan moved up the phases of the reform and will complete the reform in January 2006 instead of January 2008.

economic trends in israel69
Economic Trends in Israel
  • General data
  • Product and employment
  • Balance of payments and external stability
  • Fiscal policy
  • Monetary policy and inflation rate
monetary policy and inflation rate
Monetary Policy and Inflation Rate
  • Inflation process
  • Inflation targets
  • BOI real interest rate
  • Real interest rate and real effective exchange rate
monetary policy and inflation rate71
Monetary Policy and Inflation Rate
  • Inflation process
  • Inflation targets
  • BOI real interest rate
  • Real interest rate and real effective exchange rate
inflation 1970 2003
Inflation1970-2003

Due to the successful implementation of the Economic Stabilization Program, inflation declined from triple digits in the 1980s to Western levels.

annual inflation 1986 2003 end of period
Annual inflation, 1986-2003(end-of-period)

Inflation since 1999 has been close to zero. Inflation in 2002 reflects a nonrecurrent increase in prices and not an inflationary process. The price increase took place due to an exchange-rate depreciation after several years of high interest rates that held such an adjustment at bay. Inflation in the past twelve months (ending in August 2003) was minus 1.1 percent. The Bank of Israel is expected to undershoot inflation target again this year.

monetary policy and inflation rate74
Monetary Policy and Inflation Rate
  • Inflation process
  • Inflation targets
  • BOI real interest rate
  • Real interest rate and real effective exchange rate
12 month changes in the cpi and annual inflation targets
12–month Changes in the CPI and Annual Inflation Targets

In recent years, the Bank of Israel has applied an overly tough monetary policy. Consequently, inflation in the past few years has been lower than the government’s inflation targets, except for 2002, when it was higher. In 1999–2003, cumulative inflation was 9.5% ( assuming zero inflation in 2003) as against a cumulative target of 15.9%.

monetary policy and inflation rate76
Monetary Policy and Inflation Rate
  • Inflation process
  • Inflation targets
  • BOI real interest rate
  • Real interest rate and real effective exchange rate
the short term real interest rate derived from the bank of israel s key lending rate77
The Short-Term Real Interest Rate(Derived from the Bank of Israel’s key lending rate)*

Annual averages

* Discount Rate Deflated by Implicit Inflation Expectations

The BOI real interest rate was in recent months at very high rates in view of the economic slowdown and the absence of inflationary pressures.

monetary policy and inflation rate78
Monetary Policy and Inflation Rate
  • Inflation process
  • Inflation targets
  • BOI real interest rate
  • Real interest rate and real effective exchange rate
boi s real interest rate and the real effective exchange rate
BOI’s real interest rate and the real effective exchange rate

REER

Real interest rate

The monetary policy has kept real interest rates high and caused real currency appreciation in 1999–2001. The real currency depreciation in 2002 reflects an exchange-rate adjustment in response to real shocks that the economy experienced after October 2000. The adjustment, which became possible after the steep rate cut at the end of 2001, led to severe depreciation in the first half of 2002. Afterwards, the exchange rate leveled off.