Download To view this press release as a file

BANK OF ISRAEL
Office of the Spokesperson and Economic Information
March 29, 2017
Press Release
Remarks by the Director of the Bank of Israel Research Department,
Prof. Nathan Sussman, at the press conference marking the
publication of the Bank of Israel Annual Report
As the Governor showed, the state of the economy is good and growth is solid. In
order to complete the picture presented by the Governor, I will detail some of the
macroeconomic analyses presented in the report this year. I will then relate to a few
other issues from among the wide variety of issues covered in the report this year.
The relatively rapid growth this year was led, as in recent years, by private
consumption. However, we saw positive developments in exports and investments
this year as well, which were connected to similar changes in the global economy, and
these may portend to a gradual emergence from the long financial and economic low
in which the global economy has been since 2008.
The faster growth of the Israeli economy in the past year, compared with growth in
the OECD, is a result of the faster growth of private consumption thanks to the
financial strength of the economy, the support of accommodative monetary and fiscal
policy, and in the past year or two, the decline in relative prices, which I will discuss
later. In contrast, the economy dealt with slower growth of exports, which was
affected by the appreciation of the shekel.
Exports performed more weakly than in other advanced economies, mainly as a result
of goods exports that are more sensitive to appreciation, since they are exposed to
stronger competition in international markets. Israel’s services exports—mainly hightech services, in which Israel has a relative advantage—enjoyed greater market
strength, and therefore increased at a higher rate than other advanced economies,
despite the appreciation.
Some of the appreciation we have seen in recent years is a result of the current
account surplus—the gap between exports and imports—in Israel’s balance of
payments. As such, it is considered as deriving from positive basic forces in the
Israeli economy. In the Annual Report this year, we examined the development of the
current account from a different point of view—by looking at the surplus of savings
over investment in the Israeli economy. We found that while the rate of savings in the
Israeli economy is similar to that in other advanced economies, the rate of investment
is lower, to the point that it does not make it possible to close the gap in the standard
of living between Israel and the wealthiest countries. In particular, we found that the
rate of government investment in infrastructure and buildings is low, partly as a
result—as the Governor showed earlier—of the desire to limit public expenditure in
the economy and of the fact that the government dealt with the budgetary crisis it
Bank of Israel - Remarks by the Director of the Bank of Israel Research Department
Page1 Of3
faced in recent years through cuts that negatively impacted infrastructure investments.
Thus, a problem of a short-term character became a long-term problem.
As such, the basic surplus in the current account is partly the result of policy that
acted to shrink the size of government in the economy—a policy that resulted in,
among other things, reducing investment in infrastructure, leading to a negative
impact on productivity and long-term growth potential. Indirectly, since the current
account surplus was not a result of high productivity and growth, it led to appreciation
and a negative impact on exports—a high productivity growth engine.
One of the phenomena that has been of particular benefit to the Israeli economy in
recent years has been the improvement in its terms of trade, which is mainly a result
of the decline in the prices of products that Israel imports, but is also a result of the
increase in prices of the products that it exports. We can saw that the economy’s
profitability increased—it is purchasing at low prices and selling at high prices. This
positive development leads to two results: First, the economy’s income increases and
consumers can consume more. Second, the prices of some consumer goods decline,
so that workers enjoy an increase in their real income, while firms are not required to
increase their wages. This maintains firms’ profitability even in a tight labor market
with low unemployment. However, this phenomenon is generally temporary. Some
of the decline in import prices is also a result of the appreciation, which is obviously
beneficial for consumers in the short term, but may impair imports and growth in the
long term.
One of the issues that is also connected with the developments in the terms of trade is
the relatively moderate rate of increase in nominal wages. In the chapter dealing with
labor market issues, we examined this phenomenon, the main explanation for which is
the slightly higher level of inflation. In recent years, we have seen that total wages as
a share of GDP is stable—and even increasing—such that there is no erosion in
workers’ income relative to GDP. This follows some decline in workers’ share of
GDP, a decline which was more significant in 2002–3 and in 2009. We cannot
explain this significant decline through factors that explain the development of wages
over time—such as productivity, inflation expectations and the unemployment rate.
The analysis shows that workers’ share of GDP eroded during the economic crisis,
when workers agreed to reduced salary in exchange for job security. Another
explanation for the relative erosion of workers’ income as a share of GDP is derived
from reduced taxes on employment, chiefly income tax—which makes it possible to
increase workers’ net income in Israel relative to their peers in the OECD without
increasing gross wages or wages as a share of GDP.
Support for private consumption as a growth engine has come in recent years from
both the strong labor market and the increasing access to credit. The banking system
in Israel expanded in recent years, mainly in the areas of credit to households—
housing and nonhousing credit—and has increased at an even higher rate in the past
two years. However, the expansion of credit was congruent with the increase in
income, such that the credit taken by households relative to GDP remained stable and
low compared to reference countries.
In view of the low interest rates, the question arises regarding the proper mix of assets
to be held in the pension savings portfolio. From the standpoint of the pension saver,
the farther the investment horizon, the more desirable it is to invest in more risk assets
that generate a higher yield. The average investment portfolio of the Israeli pension
funds is more conservative by international comparison, and the percentage of shares
and other assets with a higher risk is low. In parallel, exposure to foreign markets is
also relatively small. Due to the size of the stock market in Israel relative to the
volume of pension savings, increasing the rate of investment in shares involves an
Bank of Israel - Remarks by the Director of the Bank of Israel Research Department
Page2 Of3
increase in the rate of investment abroad. The incentives for investment managers—
short-term comparisons of yields and the possibility of moving savings, which are
intended to increase competition between the entities managing pension money—may
have created a preference for achieving yields in the short term, a strategy that is not
beneficial for long-term savers.
The government is acting to increase the supply of dwellings in order to lower their
prices, by increasing the number of planned homes, permits and marketing.
Contractors’ have been able to follow suit due to an increase in labor inputs by foreign
workers, which provides some response to the short-term problem, but involves low
productivity in the industry and delays its long-term technological development.
The “Buyer’s Price” program put in place this year acted to lower home prices for
lottery winners. The largest declines in prices relative to prices in the open market
were in localities where demand for housing is high, so that land is a larger part of the
dwelling price in those localities. The benefit was made possible due to a discount on
the land and competition between developers in those localities.
This year, we chose to focus the chapter on welfare issues on the issue of internal
migration—between localities in Israel—of population groups characterized by high
poverty rates and low employment. We found that in the new ultra-Orthodox cities,
the employment rates of ultra-Orthodox men are low, and migration to these cities is
not for employment considerations, but an attempt to cope with housing costs. It is
therefore very important to create work places in these cities, as well as an efficient
public transport system to employment centers, and to carefully consider the benefit
of establishing additional cities of this type, particularly if they are distant from
employment centers.
In contrast, we found that the rate of employment among Arab women living in
Jewish cities is significantly higher than that of Arab women living in Arab or mixed
urban areas. Their migration to such localities is apparently motivated by
employment considerations and allows their integration into the labor market.
However, migration is very low, and it is therefore important to invest additional
public resources in strengthening the Arab localities and their residents.
In summation, we can see that the tradeoff between the attempt to achieve short-term
results and the results expected in the longer term is a common thread in many of the
issues on the policy agenda that are dealt with in the report. These include, for
instance, the use of lower public investment as a means to reduce short-term public
expenditure vs the long-term implications for public infrastructure and growth;
increasing short-term yields in the pension savings portfolio vs. the long-term yield
that is of real importance in such savings; increasing the number of non-Israeli
workers in the construction industry in order to increase its short-term production
capacity vs. the long-term negative impact on productivity in the industry and the
wages of its workers; and establishing new ultra-Orthodox cities as a relatively quick
solution to the housing shortage in the sector vs. the difficulty in providing quality
jobs in these cities over time.
Increasing the prominence of long-term considerations will contribute to increased
growth and the long-term well-being of Israel’s citizens.
Bank of Israel - Remarks by the Director of the Bank of Israel Research Department
Page3 Of3