Channels

Photo: Ilan Shapiro
Finance Minister Yair Lapid
Photo: Ilan Shapiro

How did Israel lose its place as leader in economic growth?

CBS figures for 2014 paint a bleak picture: Israel’s GDP will increase this year by just 2 percent, a rate significantly lower than in the four previous years and below the OECD average.

The growth rate of an economy, an expression of the annual rate of increase in Gross Domestic Product, is without doubt the most important economic parameter, because from it we derive the unemployment rate, standard of living and the government's tax-collection target.

 

 

This is the reason the goal of increasing growth is included every year in the list of objectives of the various budget proposals – and also sits at the very top of the list of the budget proposal for the coming year. A review, however, of the additional data in the budget proposal indicates that when it comes to the important issue of growth, the Finance Ministry isn't able to offer too much good news.

 

Two weeks ago, the Central Bureau of Statistics published its assessments of the national accounts for 2014, painting the following bleak picture: GDP, the total sum of the products and services the economy produces in a year, will increase this year by just 2 percent.

 

This growth rate is significantly lower than the ones recorded over the four previous years – 3.2 percent in 2013, 3 percent in 2012, 4.2 percent in 2011, and 5.8 percent in 2010, the year in which the economy began to emerge from the global slump. Only once in the past decade, has Israel recorded a lower growth rate (1.9) – in 2009, the year of the economic crisis.

 

Because the population is increasing at an average rate of 1.8 percent, growth per capita this year is expected to amount to 0.2 percent. Growth in the business sector, the more important number in fact in this context, is expected to reach just 1.6 percent – again, a significant decrease in relation to last year, when the business sector achieved a growth rate of 3.4 percent.

 

Falling behind in OECD 

When it comes to the issue of growth this year, the treasury can indeed argue extenuating circumstances; on the other hand, the Finance Ministry has fallen short from a different angle. The extenuating circumstances are Operation Protective Edge, which, according to Bank of Israel assessments, will knock 0.4 percent off the GDP. The less complimentary part of the equation is that the treasury cannot argue that the particularly low growth rate recorded this year is due to factors across the sea.

 

The Israeli economy is an open economy that exports some 45 percent of its product. Thus, when the economies abroad run into trouble and experience a slowdown, which affects demand, our product level suffers too. But according to CBS figures, the Israeli economy grew 3.2 percent last year, whereas growth among OECD countries amounted to just 1.3 percent, with the euro bloc showing negative growth of 0.4 percent.

 

After emerging from the global financial crisis, from 2010 to 2013, Israel's economy grew at twice the rate of the OECD average. This year, however, the OECD countries have overtaken us and are expected to record an average growth rate of 2.2 percent – as opposed to Israel's anticipated 2 percent. The euro bloc countries, for their part, have gone from negative growth last year to an expected growth rate of 1.2 percent in 2014 – in contrast to the opposite trend in Israel.

 

The future in terms of growth doesn't look very rosy either. Recent demographic forecasts from the CBS indicate a fall-off in the potential for growth over the coming years. According to these forecasts, the period 2014-2019 will see a significant drop in the growth rate of the working-age population (25-64), to an average level of just 1.1 percent a year – in contrast to an annual rate of increase of almost double that, 2.1 percent, recorded in recent decades.

 

Moreover, this low growth rate among the working-age population will not be equally spread across the board. The growth rate of the ultra-Orthodox (Haredi) and Arab sectors will be far quicker and dramatic than that of the non-Haredi Jewish population, which is expected to amount to an average of just 0.3 percent a year during the period in question.

 

Lapid and Netanyahu: Cause for concern (Photo: EPA) (Photo: EPA)
Lapid and Netanyahu: Cause for concern (Photo: EPA)

 

 

In addition, because both productivity and the rate of participation in the workforce among the non-Haredi Jewish population are far higher, the low growth rate of this population will also adversely affect the economy's potential for growth.

 

The bad news

And we're not done yet. Israeli exports, undoubtedly the economy's growth engine in previous years, have simply come to a standstill over the past three years.

 

This year is expected to see a 0.5 percent drop in the export of goods and services, as opposed to the slight increases recorded in the past two years – 1.5 percent in 2013, and 0.9 percent in 2012 – and the handsome increases seen in the two years before then – 6.5 percent in 2011, and 15.1 percent in 2010.

 

As in the case of economic growth, part of the fall-off in exports this year stems from the damage sustained by the tourism industry as a result of Operation Protective Edge.

 

In contrast, private consumption is expected to grow this year by 3.3 percent, similar to the rate recorded last year, and slightly higher than the number for 2010. These developments reopen the discussion on the subject of consumption-led growth, which describes a situation in which private consumption grows at a faster rate than economic growth.

 

 

Growth of this kind is far less pleasing than export-led growth or investment-led growth, which are described in the professional literature as "sustainable growth."

 

The reason for this is that the downside to a sudden spike in private consumption is an inevitable decrease in savings. And under the assumption that the public does not have infinite savings, the increase in private consumption takes on a transient nature.

 

 


פרסום ראשון: 10.07.14, 00:20
 new comment
Warning:
This will delete your current comment