OECD Lowers Israel's Growth Outlook; Economists Say Gov't Action Needed to Revive Export

Downgrade to growth of just 2.4% is latest in surfeit of bearish news for the economy.

Bank of Israel Governor Karnit Flug and Finance Minister Moshe Kahlon, March 9, 2016.
Olivier Fitoussi

Israel got another dose of bad news about its economic outlook on Wednesday, as the Organization for Economic Cooperation and Development sharply cut is forecast for Israel and economists warned that government steps were necessary to revive exports.

The OECD said Israel’s gross domestic product would grow just 2.4% this year, down from its previous forecast of 3.25% last November. It said the pace should pick up again in 2017 to 3.1%.

“An expansionary budget and continuing low interest rates and oil prices should support domestic demand and employment,” the OECD said. “Exports have been very weak of late but should pick up with a gradual strengthening of foreign demand, albeit damped by the shekel’s appreciation.”

The forecast came a day after the Central Bureau of Statistics reported that the decline in Israeli exports, particularly in the high-tech sector, accelerated in the period from February through April. Before that, Bank Hapoalim lowered its projected GDP growth rate to 2.2% this year, down from a previous projection of 2.8%.

In the first quarter, Israeli GDP growth slowed to just an 0.8% annualized rate. Yoram Ariav, who was treasury director general in 2007-09, noted that the increase in Israel’s per capita GDP had outpaced the OECD until 20913, but had been falling ever since.

Economists on Wednesday offered up a host of reasons for the decline in exports, which has been the main factor slowing economic growth. They pointed to tepid investment in machinery and equipment, lack of business confidence, excessive bureaucracy and zig-zagging government policy.

“True, the drop in exports has been affected by the very slow growth in world trade, but you can’t blame the world entirely – we’re also at fault,” said Ariav. “Investment is the key to current and future growth.”

Not only Israel’s outlook is gloomy. The worldwide recovery is set to stall this year, with output seen growing 3%, the OECD said on Wednesday. “Trade is growing at 2 to 3 percent; it should be growing at 7,” the organization’s secretary general, Angel Gurria, said in a Bloomberg Television interview.

Ariav said Israeli investment in machinery and equipment had been lagging. The economy, he said, was too reliant on consumer and government spending to carry it, an observation confirmed by the OEC, which forecast consumer spending growth of 4.2% this year and a 2.5% increase in government spending. Merchandise and service exports are forecast to edge up a bare 0.2%.

Ariav also warned against exaggerated policy focus on the country’s vaunted high-tech industry, which he noted comprised no more than 8% of GDP.

“The main reason for the situation is a lack of confidence in the system generally. Investment is based on confidence. Today no one believes in anyone so no one invests,” he said.

“When people are worried about changes in policy from one day to the next, when there’s no confidence in the future, investment is hurt and when investment is hurt so is growth.”

Gal Hershkovitz, who was head of the treasury budget division in 2011-13, warned against reading too much into the latest export data. Like other economists, he said Israeli exports were dominated by three companies – Teva Pharmaceuticals, Israel Chemicals and Intel Israel – whose overseas sales were subject to swings.

He recommended a package of changes, among them improving efficiency in the public sector, which adds to exporters’ costs, and the easing of regulatory burdens.

“We need to freeze any directive, regulation or rule that affects the cost of production until it has been examined for its costs and benefits,” Hershkovitz said. “We also need to set quantifiable target for every ministry to reduce ineffective regulations.” He added that measures like export guarantees and government-backed investment funds would help, too.

Ariav said the government should consider amending the Law for Encouraging Capital Investment to make it more effective and to spread the risk of capital spending to the state. But Omer Moav, an economist at the Herzilya Interdisciplinary Center and the University of Warwick in England, warned against the government going all-out to reverse the decline in exports.

“Exports aren’t an end but a means to improve the quality of life of the country’s citizens,” he said. “There’s no sense in subsidizing exports or exporters; you want long-term economic growth.”

Hershkovitz pointed to longer term changes that will weigh heavily on Israel’s long-term economic growth. Among the is the growth of the ultra-Orthodox and Israeli Arab populations, which are less likely to work or have high skill levels.

“Growth in the United States and Europe is reasonable, so the figures show us that the problem is internal. We are experiencing demographic changes and an aging workforce,” Hershkovitz said.