the israeli economy may 2009

Department of Economic Research, Economics Division

May 2009

The Israeli economyThe Israeli economy


Starting Point


5 Years of Rapid Economic Growth

5.0% 5.1%5.2%5.4%

4.0%

3.2%3.3%3.3%3.5%

2.1%

6.8%

6.2%6.4%6.2%

4.4%

GDP GDP per Capita Business Sector GDP

2004 2005 2006 2007 2008

The Israeli Economy in 2008Real Annual Changes


A Continuous Decline in Unemployment Rate

10.7%10.4%

9.0%8.4%

7.3%

6.1%

2003 2004 2005 2006 2007 2008

As Percent of Civilian Labor Force

A Sharp Decline in Unemloyment Rate

180K


Export Intensity Growth

40%43.2%43.4%42.9%

41.6%

37%35%

33%

37%

34%

30%29%28%29%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Export Intensity Export / GDP Ratio


A Rapid Growth in Israeli A Rapid Growth in Israeli IndustryIndustry

1.1%

7.0%

18%

1.7%

3.7%5.0%

3%

10%

12%

4%4.5%

12.2%

1.9%

8.6%7.0%

Industrial Output Industrial Export* Employees

2004 2005 2006 2007 2008

Real Annual Changes

5 Continuous Years of Growth in Israeli Industry

*Not Including Diamonds


The High Tech Sector Contribution The High Tech Sector Contribution to Industrial Growth in 2004-2008to Industrial Growth in 2004-2008

69%

53%

70%

To Industrial Output To Employment inIndustry

To Industrial Export

The High Tech Sector Contribution to Industrial Growth in 2004-2008*

As Percentage of Total Growth


A Continues Surplus in The Current Account Balance

Source: Bank of Israel

-1.2%

-3.5%

-4.3%-5.1%

-1.2%

1.2%

2.4%3.3%

6.0%

3.2%

1.9%

0.8%0.3%

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

2008

2009Frcst.

A Surplus in The Balance of Payments Current AccountAs Percentage of GDP


Corporate Tax Reduction

34%

31%

29%

27%26%

25%

2005 2006 2007 2008 2009 2010F

Reduction of a Corporate Tax in Israel


Towards 2009


Strengths

• World leader in R&D investments

• Highly educated human resources

• An advanced economy

• A Rise in capital adequacy ratio

• High saving rate


1.3% 1.1% 1.1% 1.0%

1.6%1.7%1.9%2.1%

2.5%

3.2%3.2%3.4%3.6%

4.5%

Israel is The World Leader in Civilian R&D Investment As Percentage of GDP, 2006

2007

4.7

%World Leadership in Civilian World Leadership in Civilian R&D InvestmentsR&D Investments

Source: OECD, Israeli CBS


Quality of Scientific Research Institutions

Source: The Global Competitiveness Report 2008-2009, World Economic Forum

5553

4537

2717

1615

1413

98

76

43

21U.S.A

SwitzerlandIsrael

CanadaGermany

U.K.Australia

FinlandSingapore

Korea, Rep.Japan

FranceIreland

IndiaChina

RussianLuxembourg

Spain

The Global Competitiveness Report 2008/9* Ranked Israel 3rd in the World by the Quality of scientific research institutions Index

* Of The World Economic Forum


Availability of Scientists and Engineers

5238

3226

2218

16

149

87

65

4

32

1FinlandJapan

IndiaSwedenFrance

USACanadaTaiwan

IsraelIreland

SwitzerlandNorway

SingaporeGermany

U.K.SpainChina

The Global Competitiveness Report 2008/9* Ranked Israel 9th in the World by the Availability of Scientists and Engineers Index

* Of The World Economic Forum

Source: The Global Competitiveness Report 2008-2009, World Economic Forum


Strengths







Highly Educated PopulationHighly Educated Population

45%

45%

39%

37%

35%

34%

32%

31%

30%

29%

28%

28%

26%

26%

25%

24%

21%

12%11%

Israel

Canada

USA

Japan

Sweeden

Finland

Denmark

Australia

Korea

Netherlands

Ireland

Switzerland

Spain

GB

Germany

France

Greece

Czech Republic

Italy

Highly ducated Education Graduates, 2004 Post High School Educated As Percent of population in the ages of 25-64 ,2004

Source: OECD, Israeli CBS


Strengths







17.0

14.813.7

12.110.910.810.7

9.2 8.7 8.4 8.3 7.9 7.9 7.9 7.6 7.6 7.5 7.5 7.1 7.1 6.9 6.8 6.7

5.0

ICT Sector GDP, Out of The Business Sector GDP 2006

2007

17%

The Share of ICT Sector Out of The Business Sector GDP

Information & Communications Technologies, 2006

Source: Israeli CBS


Strengths







A Rise in Capital Adequacy Ratio in Most Israeli Banks

Israeli 5 largest bank groups have relatively high Capital Adequacy Ratio, compared to the requirement set by Basel Committee on Banking Supervision (8%)

11.5%

10.3%

10.9%

11.4%11.3%

12.1%

11.5%

10.6%

11.4%11.4%

Hapoalim Leumi Discount Mizrahi-Tefahot First InternationalBank of Israel

2007 Q3/08

Credit/Equity Capital


Strengths







Household saving ratesPer cent of disposable household income

Source: Leumi Bank


Weaknesses

• Erosion in exporters profitability

• High labor costs

• Relatively High Corporate Tax

• Off Shoring

• High exposure to the developed

economies


-18%-15%

-11% -10% -9%

15%

2%

-3%

-26%

5%

Israel EuroArea

China Canada Japan Malaysia Taiwan Mexico India S. Korea

Israel: A Sharp Revaluation Compared to Main CompetitorsChange in Local Currency Against US Dollar, 1/1/2006-30/9/2008

2006-2008: A Sharp Revaluation 2006-2008: A Sharp Revaluation of the Shekelof the Shekel

Since Oct. 2008 the Shekel depreciated by 20% against the Dollar


Loss of Clients, 64%

Other, 2%

No Loss of Clients, 34%

Revaluation Implications Survey Revaluation Implications Survey Erosion of Competition Ability

At the Time of the Survey: NIS/Dollar= 3.371

Source: Revaluation Survey, Manufacturers’ Association of Israel. July 2008.


Weaknesses




• Off Shoring


economies


High Labor CostsHigh Labor Costs

17,993 19,45715,240

68,108

76,159

Russia China India Israel U.S.A

A yearly salary of an experienced software engineer

Dollar 2008

Source: Atsmon-Pilat


Weaknesses




• Off Shoring


economies


Source: KPMG, 2008

2008 - Relatively High Corporate Tax

10%

10%

16%

16%

18%

19%

23%

24%

25%

25%

25%

26%

27%

28%

31%

33%

30%

28%

12.5%

Cyprus

Bulgaria

Ireland

Hungary

Rumania

Singapore

Switzerland

EU average

Russia

Austria

Greece

Denmark

Finland

Israel

Sweeden

U.K.

Spain

Italy

France

Israel - Relatively High Corporate Tax, 2008

Israel 2009: 26%


Weaknesses




• Off Shoring


economies


Off shoring31%No Answer

15%

Planning to Offshore

21%Not Planning to Offshore

33%

In the next 2 years- 52% will be off shoring

Source: Off shoring Survey, Manufacturers’ Association of Israel. May 2008.


Weaknesses




• Off Shoring


economies


60% of Israeli Export of Goods is Shifted to the US & the EU

EU33%

US28%

Asia16%

Other23%

Distribution of export according to areas, 2008


2009: A Sharp Decline in Developed Economies

-3.2%

-4.0%

2.8%3.1%

2.9%2.6%

2.0%

2.7%

0.9%1.1%0.7%

-4.3%

Euro area US OECD

2006 2007 2008 2009F

Developed Countries GrowthReal GDP Annual Growth

Source: Economist, Apr. 2009


2009 Forecasts2009 Forecasts


2009:A Decline in Israeli Economy

5.2% 5.4%

4.0%

-2.1%

3.3% 3.5%

2.1%

-3.8%

6.4% 6.2%

4.4%

-2.6%

GDP GDP Per Capita Business-SectorProduct

2006 2007 2008 2009 Frcst.

The Israeli Economy in 2009Real Annual Change


An Increase in Unemployment Rate

10.7%10.4%

9.0%8.4%

7.3%

6.1%

8.4%

2003 2004 2005 2006 2007 2008 2009Frcst.

UnemploymentAnnual Change


Thank you

Manufacturers’ Association of Israel

the israeli economy may 2009

Economy & Finance

shoring high exposure

high corporate tax source

high capital adequacy

shoring source

israeli economy

high tech sector contribution

advanced economy

strengths world leader