Bank of Israel: Economy Lags in Many Key Measures

Report slams Finance Ministry’s flagship program, saying it would fail in its goal to bring down housing prices.

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Bank of Israel Governor Karnit Flug.Credit: Olivier Fitoussi

Israel’s economy is performing well relative to other developed countries, but it is lagging on key indicators and policy makers need to do more to ensure long-term growth, Bank of Israel Governor Karnit Flug said on Sunday to mark the release of the bank’s 2015 annual report.

Israel’s economy grew 2.5% last year, about the same rate as in the previous three years but lower than its historic rate and is not growing as fast as the labor force, the central bank said in its report. Growth has been slowing because of slackening population growth and a shortage of manpower in the key high-tech industry.

Declines in investment and exports were offset by a 4.9% jump in consumer spending, it said. But, worryingly, Israel’s productivity growth and per capita GDP were both lower than for countries belonging to the Organization for Economic Cooperation and Development, it said.

“Israel’s success in coping with short-term challenges and the fact that the state of the economy is reasonable relative to the global environment should enable policy makers to step up efforts to close the gap between us and the developed countries in several areas and create the infrastructure for future growth,” she told a press conference.

The report said that per capita GDP – the widely accepted measure for a country’s relative economic performance – had narrowed from 25% below the average for OECD countries in 2006 to 15% in 2013. But much of the narrowing difference was due to the 2008 global financial crisis, which hardly affected Israel. In 2015, the gap began to rise again and was 17%.

“If we were to close the productivity gap with the average for the OECD, we would be able to raise our standard of living by about a third,” Flug said.

Exports, which are supposed to be the driver of the economy, declined 1.3% in 2015, reversing a 4.9% increase the year before. The Bank of Israel report ascribed the decline to slowing world trade as well as to deterioration in Israel’s competitive ability. Exports prices for Israeli products were higher than for rival economies, in part because of the strong shekel, it said.

Merchandise exports haven’t grown at all since 2012 while exports of business services broke a five-year increase totaling 11% to end down 2.5% last year. The decline was paced by high-tech services, especially research and development. Incoming tourism, which is classed as a service export, dropped 0.9% last year amid the lingering impact of the 2014 Gaza war.

Prime Minister Benjamin Netanyahu, responding to the report, pointed to free-trade negotiations that have begun with China and parallel talks with Japan on most-favored-nation status. He also said Israel needed to resolve logjams in developing its natural gas reserves.

The central bank report was particularly critical of the flagship Finance Ministry program, called Machir L’Mishtaken (Target Price), to rein in rising home prices. The report said the program would fail to bring down prices and only serve to increase demand.

“The program isn’t increasing the supply of homes as a rule, only the system for selling state-owned land that was already due to be sold to begin with,” it said, saying a rough estimate by central bank economists found that the program accounted for only 15% of all home sales in a given year.

Research by the bank found that young couples between the age of 25 and 39 who had bought a home in the last several years, since housing prices began to climb sharply, were being forced to work longer hours in order to cover their higher mortgage costs.

For instance, people who had not bought a home before prices began climbing about a decade ago had much higher labor force participation rates than those who already bought a home. It said the number of monthly salaries needed by those who had bought their first homes had risen 15% from 2002 to 2013.

The report was highly critical of government policy.

However, it said a plan to allow foreign building companies to operate in Israel — if enough companies took up the offer — could help the domestic industry, which has been held back by poor technology and inefficient methods.

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