The Israeli Economy:Recent Trends and Outlook

Yoel NavehChief EconomistDecember 2017

Outline

• Recent economic trends– Local growth rates have moderated, reflected in GDP

– Mixed trends in exports

– Labor market reflects full employment

– Zero bound policy leads to asset prices appreciation

• Economic outlook– Continued growth, close to potential

– Growth of wages and employment, low inflation and cheap credit support consumption

0.9%

2.5%

4.1%

-1%

1%

3%

5%

7%

9%

11%

13%

Correction due to large scale car purchases

in Q4

Israel has enjoyed continued growth for the last 15 years

Source: CBS

The Second

Intifada

Global

Economic

Crisis

3

4Source: IMF

Israel’s GDP per capita has improved in the past decade,

currently ranked 23rd among OECD countries

5

15

25

35

45

55

65

75

85

95

105GDP per capita (PPP) , 2016 000’s $

5

The cost of living in Israel negatively affects the standard of living

Source: IMF WEO October

Australia

Austria

ChileCzech Rep

Denmark

Estonia

Finland

France Germany

Greece

Hungary

Iceland

Ireland

Israel

Italy

Japan

Korea

Latvia

Luxembourg

Mexico

New ZealandNorway

Poland

Portugal

Slovak Rep

Slovenia

Spain

Sweden

Switzerland

Turkey

USA

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

0 20,000 40,000 60,000 80,000 100,000 120,000

Purchasing Power Parity, 2016(Local price level compared to US, parity=1)

Consumption has led the economic growth in recent years and is expected to contribute to growth in the medium term

6

* According to the forecast of the Chief Economist

Source: CBS. The Chief Economist Dept. calculations.

55%

23% 20%

2%

In 2017*, the GDP is 1,257 billion NIS

4.0%4.3%

3.4%

1.0%

2.9%

3.2%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

GDP Components: Average growth rate

for the years 2012-2017*

Public

Consumption Investments

Private

Consumption

Net Exports

The high-tech sector, gas production and the decline in energy prices have contributed to the structural surplus in the current account

7

* 2017 - First half at annual rateSource: CBS.

-4.8%-4.6%

-2.8%

-0.7%-1.4%-1.4%-1.5%

-1.0%

0.7%

1.9%

3.4%

4.7%

3.3%

1.4%

3.9%3.5%

2.5%

0.6%

3.4%3.9%

5.2%

3.8%

2.8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

-6

-4

-2

0

2

4

6

8

10

12

14 Current Account BalanceIn billions of $US and as percentage of GDP

Billions of $US (LHS)

% of GDP (RHS)

Exports of services exhibit strength while exports of goods remain weak

8* January –September

Source: CBS, CPB .

Exports of goods

and services

(Billions ILS)

World trade

Index (CPB)

0

10

20

30

40

50

60

70

80

90

0

20

40

60

80

100

120

140

As a % of the exports:2000 – 65.6%

As a % of the exports:2010 – 69.4%

As a % of the exports:2017* – 56.4%

As a % of the exports:2000 – 34.4%

As a % of the exports:2010 – 30.6%

World trade (RHS)

Exports of goods

(LHS)

Exports of services As a % of the exports:2017* – 43.6%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

40

90

140

190

240

290

340

390 Employees in the high-tech sector

Future growth of services exports depends on further expansion of

employment in the high-tech sector

9

*2017- January - August

Source: CBS.

High-tech employees,

as % of business sector

employment (RHS)

High-tech employees

(LHS)

**Q1 –Q3 in annual terms

Source: IVC.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0VC investments in Israel

Billions $US

Local VC Foreign VC

Thousands

Coal

71%

Natural

Gas

18%

Petroleum

Products

11%

Shift in Israeli Electric Fossil Fuels

Consumption

Natural Gas Discoveries

Natural Gas: game changer for trade and energy sectors

2017**

2000 2009 2010 2011 2012 2013

c. 1 TCF

Yam

Tethys

c. 11

TCF

Tamar

/ SW

c. 0.5

TCF

Dalit

c. 18-

22

TCF

Leviat

han

c. 0.1

TCF

Dolph

in

c. 1

TCF

Tanin

c. 1.3

TCF

Karish

Decreasing Reliance on Fuel Imports

Source: CBS; IEC Company’s filings; Delek Drilling LP Company’s filings; Noble Energy Inc.

2006

0

5

10

15

20 Fuel Imports ($ BN)

Natural Gas

47.7%

Coal

45.1%

Liquefied

natural gas

5.6%

Other

1.6%

*January – October at annual rate

** January - September

Labor market indicators reflect full employment

11

* January – October average

Source: CBS.

4.2%

64.0%

57%

59%

61%

63%

65%

4%

6%

8%

10%

12%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017*

Participation Rate and Unemployment Rate in IsraelAge 15 and older

Participation Rate

(RHS)

Unemployment Rate

(LHS)

12

Wages increased significantly since 2014, faster than labor productivity

0.9%1.1%

2.9%

2.8%

2.9%

8,200

8,400

8,600

8,800

9,000

9,200

9,400

9,600

9,800

Monthly data

Annual average

The increase in wages reflects a high

level of employment, compensation for

previous years and implementation of

policy measures (min. wage, etc.)

Source: CBS. Minimum wage impact was calculated

by the Chief Economist Dept.

2017 growth rate is seasonally adjusted and refers to

January-September.

Wage growth

between 2008-2011

was lower than the

growth in labor

productivity

2018201720162015

5.56.13.86.1% change in minimum wage

1.11.20.81.2% contribution to average wage

Wages, fixed prices (2011)

10%

17%

11% 11%

9%

11%

8%

10% 10% 10%

11%

8%

13%

21%

0%

5%

10%

15%

20%

25%

-10

0

10

20

30

40

50

60

70

80

Hotel andrestaurantservices

Managementservices

Agriculture Education Wholesaleand retail

Health,social

services

Construction Transportand postalservices

Real estate Technicalservices

Industry Government Financialservices

IT

0-6,000 6,000-9,000 9,000-14,000 14,000-18,000

Fast pace of wage increases was recorded in sectors with

low paying jobs, and also in the hi-tech sector, 2013-2017

Wage increases in the low-paying sectors were led by both strength of the labor market and an increase in minimum wages.Wages in the hi-tech sector reflect supply constraint

Job creation was biased towards sectors with lower wages and productivity

13

* 2017 data based on January – August averageSource: CBS.

Growth of

GDP per

capita

•Average growth

of 1.8%

Growth of

Disposable

Income

•Average growth of

2.2%, mainly as a

result of decrease in

tax burden and

improvement in net

external assets

Growth in net

household

income

•Average growth

of 2.3%, mainly

due to GDP

growth, and

increased

participation in

the labor force

Growth in Net

household income,

deciles 1-5

•Average growth of

3.3%, due to GDP

growth, increased

participation in the

labor force, and

raises in minimum

wage and allowances

Growth in

consumption,

deciles 1-5

•Growth of 2.8%

in private

expenditure on

consumption, as

a result of the

increase in

disposable

income

GDP growth has trickled down to private consumptionchange between 2007-2015

15

Inequality in Israel has stabilized, contrary to worldwide trend

Source: SWIID ,NII ,OECD; The Chief Economist Dept. calculations

Gini-coefficient of economic inequalityGini-coefficient of economic inequality

Gross incomeNet income

40

42

44

46

48

50

52

54

25

27

29

31

33

35

37

39

Demographic change creates challenge for future growth and productivity

Source: CBS, adjusted to immigration statistics.

1.8%

1.4%

0.4%

3.0%

4.0%

Total SecularJewish

population

Arabminority

Ultra-Orthodox

Jews

Totalpopulation

Work Force

Population % change2015-2019

Participation RateMain labor ages, 2016

80.7%

64.0%57.6%

TotalPopulation

Ultra-OrtodoxJews

Arab minority

14

The inflation environment remains low and the accommodative monetary policy

persists with zero bound interest rates, similarly to many OECD countries

17

-2%

0%

2%

4%

6%

8%

10%

12%

14%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Real Interest Rate Nominal Interest Rate Inflation Expectaions

*

*2017: January-November

Source: Bank of Israel

Zero bound interest rate environment contributes

to appreciation of asset prices

18

• 2017 – January - November (except Apartments - August)

• Source: CBS, TASE, Chief Economist Department calculations

-5%

0%

5%

10%

60

80

100

120

140

160

180

200

220

240

260Asset prices and real interest rate

For Asset Prices - Jan 2009 = 100

*

TA 125

Apartments

Sovereign

Bonds

Real interest

(RHS)

The low interest rate environment has not reversed public and business

sectors’ deleveraging, while household debt grows moderately

19Source: BOI, CBS.

150%

160%

170%

180%

190%

200%

210%

220%

230%Total credit

as % of GDP

0%

20%

40%

60%

80%

100%

120% Credit compositionas % of GDP

business sectorhouseholdshousing loansgovernment and municipal authorities

Israeli savings rate is relatively high, following an increase of 4%since 2008 when compulsory pension was introduced

Source: OECD

7.8%

11.3%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Saving net as % of GDP 2015

2.4%

1.5%1.2% 1.2% 0.9%

0.3% 0.0%

-1.7%-2.5%

-4.0%Fruits and

VegetablesHousing Apartment

maintenanceMisc Health Education and

entertanmentFood (excl. Fruitsand Vegetables )

Transportationand

Communications

Furniture andhouseholdequipment

Clothing andFootwear

(comparing 2017* and 2016 averages)

5.0% 25.0% 11.9% 19.3%

Inflation environment remains low and is affected by the government’s

efforts to reduce the cost of living

22

Percentages represent weights of CPI categories

* January – October of 2017

2.9% 9.4% 5.8% 13.7% 3.7% 3.2%

Reforms reduced the size of the public sector. Since 2009 the share of interest payments and defense expenditure in GDP terms have leveled

24Source: CBS, Chief Economist Dept. calculations.

36% 36% 36% 35% 34% 33%35% 35% 35% 32% 31% 31% 31% 31% 31% 30% 30% 31% 31% 31% 31% 31%

6% 6% 6% 6% 5%5%

5% 4% 5%5%

5% 4% 4% 3% 3% 3% 3% 3% 3% 3% 3% 3%

9% 9% 8% 8%8%

8%8% 9% 8%

8%8% 8%

7% 7% 6%6% 6% 6% 6% 6% 6% 6%

50% 50% 50%49%

47%45%

48% 49% 48%

45%44% 43%

42% 41% 41%40% 39% 40% 40% 40% 39% 39%

10%

20%

30%

40%

50%

60%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

General Government Expenditure as % of GDP

Civilian expenditure Interest payments Military expenditure

Government expenditure of GDP in Israel is compatible with OECD countries while civil government expenditure is relatively low

Source: OECD

Composition of Government expenditure (2015) as % of GDP

* 2014, Latest available data

57% 55% 55% 54% 52% 50% 50% 49%45% 44% 44% 43% 43% 42% 40% 39%

37% 37%34%

32%

0%

10%

20%

30%

40%

50%

60%

Social Welfare Education Defense Health other government expenditure

22%

5%1%

8%

16%

11%

7%

6%

5%

11%

22

The downward trend of the government debt to GDP ratio continues

26Source: MoF, CBS, The Chief Economist Dept. calculations.

97.9%

95.9%93.9%

95.6%

89.6%

79.5%

83.7%

90.2%

92.9%91.3%

88.2%

80.2%

73.1%72.2%

74.8%

71.0%

69.0%68.4%67.0%

66.0%

63.8%62.4%

60%

65%

70%

75%

80%

85%

90%

95%

100%

105%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Public Debtas % of GDP

Global Economic

Crisis

3.3%

1.7%

0.9%

0.0%

2.1%

4.8%

3.5% 3.1%3.9%

3.1%

2.7%

2.1% 2.1%

1.5%

6.0%

5.5%

3.0%

2.0%

4.7%

3.0%2.9% 2.9%

0%

1%

2%

3%

4%

5%

6%

7%Central Government

Ceiling

Central government deficits have been below the ceiling since 2013

27Source: CBS, MOF

Central government budget deficitas % of GDP

28

GDP growth forecasts are close to potential, output gap is slightly

positive

3.5%

2.6%

4.0%

2.9%3.2% 3.1%

1%

2%

3%

4%

2014 2015 2016 2017 2018 2019

Private consumption continues to lead

growth

Public expenditure is rising

Investments expand due to construction

and investment in gas infrastructure

Exports :

Recovery in goods

(negative overall trend)

Services expand rapidly

Modest recovery of inflation

Labor market reflects full employment

Risks and alternative scenarios

• External risks:

– Geo-political tensions affect real economy

– Slower US growth

– Correction is the stock-markets

– Inflationary pressures leading to the tightening of the monetary policy

• Internal risks:

– Earlier (than expected) gas exports

– Continued weakness in exports of goods. Possible negative impact of large exporting companies

– Labor market retreats from full employment

Summary

31

• During 2017 growth rates moderated, reflecting a partial correction to strong

growth in 2016.

• The high-tech sector has become large and developed, leading in productivity and

supporting wage growth

• Exports of services exhibit strength while exports of goods remain weak. Future

growth of services exports depends on expansion of high-tech sector employment

• Labor market is at capacity, supporting wages across various sectors

• The external stance of the economy is strong due to a surplus in the current

account and foreign assets

• GDP forecast reflects continued growth of private consumption and mild growth

of investments and exports

32

Thank you