Israel Revises Economic Forecast, Predicting Higher Growth

With GDP expected to be 3.5% this year, the country’s new finance minister will have an easier time keeping election promises.

Bloomberg

Treasury officials are preparing bullish new estimates for economic growth this year as data coming in for the final part of 2014 and early 2015 show growth rebounding at a faster pace than anyone predicted just a few months earlier.

A final estimate is still being calculated, but Finance Ministry officials said they are now expecting Israel’s gross domestic product to expand 3.5% this year. That would mean a much faster pace of growth than the 2.8% officials were talking about last summer when they provided the first estimate ahead of the 2015 budget.

Behind the new optimism is preliminary data for the fourth quarter of 2014, which showed GDP surging ahead at a 7.2% annual rate, it fastest since the first quarter of 2008. That raised growth for all of 2014 to 2.9%.

Meantime, Israel’s unemployment rate fell to 5.9% last year from 6.2% in 2013 even as the percentage of the working age population grew to a very high 64.2%. The economy bounced back quickly from the effect of last summer’s Gaza war while a weaker shekel has been spurring higher exports, mainly to North America and Asia.

Faster growth and low unemployment means the government will be collecting more taxes in 2015 than it expected, which could trim the budget deficit to just 2.5% of GDP this year, far lower than the 3.4% the treasury had planned on when it put together the 2015 budget.

That budget never won Knesset approval because Prime Minister Benjamin Netanyahu called elections. Now, whoever takes over the finance portfolio after the March 17 election will have a much easier time keeping campaign promises for more spending.

Officials at the treasury and the Bank of Israel are discussing how they will revise estimates for economic growth and other economic parameters. The two uses different models, which has resulted in different estimates until now, but both will be higher than previously forecast.

At the end of December, the treasury was already talking about 3% growth, higher than the official figure in the 2015 budget. The central bank had most recently raised its estimate to 3.2% and is expected to revise it higher again at the end of March.

One of the drivers for economic growth in last few years has been the growing number of working age people holding jobs, the labor force participation rate. Year after year, economists have warned that the economy can’t absorb all those new entrants and that the jobless rate will turn higher to 7% or even 8%.

But, in practice, the reverse has happened. Israeli unemployment is at its lowest in a decade and what there is is frictional, the result of people being between jobs and other temporary factors.

In the previous decades Israel had been in the bottom rungs in terms of the labor force participation rates for developed economies, which weighed on economic growth and incomes.

These days, however, Israel is among the countries with the highest labor force participation rates, especially for women. In November, the last month for which figures are available, the number of Israelis working full-time jobs reached a record high while those holding part-time positions reached a low.

The labor force participation rate for men reached 69.3%, down from 69.8%, while the rate for women was 59.3%, up from 58.5% in December. The January figure typified the trend of falling rates for men and rising rates for women.

With unemployment falling and more people in the work force, wages should have been rising, but that hasn’t happened, even in sectors where demand is especially high, like high-tech.

On Sunday, the Central Bureau of Statistics reported that the average wage in Israel rose 2% after inflation last year to 9.398 shekels ($2,338) a month.

But there are still problems facing the Israeli economy. Ultra-Orthodox men and Israeli Arab women still have low rates of participation in the labor force.

More importantly, as treasury officials point out, labor productivity remains low. Bank of Israel Govenror Karnit Flug has said that Israel’s productivity growth is too slow to close the gap with other developed economies. Productivity in industry, especially in technology and other export-oriented sectors, is high but that is not the case in industry geared toward the domestic market, she says.