Bank of Israel Warns of Long-term Decline in Economic Growth

Study says changing demographics will weigh on the economy over next decades

Bank of Israel.
Emil Salman

Israeli economic growth is slowing and will continue slowing, even if the government takes measures to accelerate it, because of unfavorable demographics, the Bank of Israel said in a gloomy forecast released on Wednesday.

In the years 2000-2016, the study noted that Israel’s economy expanded at an annual average rate of 3.3%, but the slowdown has already begun. In this decade, the annual rate has slackened by 0.8 percentage point compared with the previous decade. Growth in 2017-2035 will average 2.7% a year and in 2036-2065, the final year of the outlook, will decline to 2.3% annually.

On average the forecast sees Israel’s gross domestic product expanding at an average of just 2.4% annually for the half century from 2015, which means per capita GDP will grow at a tiny 0.7% a year.

The study by Bank of Israel economists Shay Tsur and Eyal Argov was released as a chapter in the Bank of Israel’s annual report, which will be published in full later this year.

To mitigate the problem the central bank urged the government to launch massive undertakings in the areas of employment, education, infrastructure development and in making it easier to do business.

Without that, it warned, the gap in the standard of living between Israel and much of the developed world is predicted to grow wider.

Then reason for the bearish outlook is that the growth of Israel’s prime working age population, ages 25-64, is expected to slow in coming years. The phenomenon has already begun and is expected to grow more severe over time, it said.

At the same time Israel’s elderly population will keep growing, so that a larger part of the country will be out of the workforce.

Another problem, the study pointed to, is that the increase in the number of years of education Israelis have, which translates into higher-productivity employment, is no longer rising. Meanwhile, the central bank assumes that the growth Israel has seen in the percentage of working-age Israelis holding a job or actively seeking one will taper off.

“The scope of education has increased rapidly since the mid-1990s thanks to the opening of academic colleges. The labor force participation rate also rose, due in part to the increasing integration of women in the labor market,” the Bank of Israel said.

“However, these positive factors have exhausted themselves in recent years because the rate of education and employment among non-Haredi Jews is already high, compared to Western countries,” it said.

Although the forecast is gloomy, the report assumes that the government’s efforts to bring more ultra-Orthodox men and Arab women into the workforce will continue. Both groups have low rates of labor force participation, but the percentages have been growing over the last 20 years.

Depending on different variables annual growth could fall to as little as 1.8% on average or reach as high as 3%, compared with the central forecast of 2.4%.

The labor force participation rate for Haredi men has recently gone into retreat. The Central Bureau of Statistics said last month that it averaged 50.3% last year, down from 51.2% in 2017.

In the worst-case scenario, the Bank of Israel predicted that per capita GDP in 2065 would be 6% lower than the baseline forecast. On the other hand, in the best-case scenario, in which Arab women and ultra-Orthodox men entering the labor market have the same education and training as other Israeli Jews, per capita GDP would be 3% higher than the baseline forecast.

The study said the biggest challenge the government faces is bringing the levels of numeracy and literacy of Haredi men up to the level of their non-Haredi Jewish peers. Today, young ultra-Orthodox males get a minimum of general education and from an early age devote themselves to religious studies.

The problem is especially acute as the share of adult Haredi men in Israel’s population is expected to grow from 3.6% in 2015 to 11% in 2065, while the overall ultra-Orthodox share of the population will reach 25%.