Finance Ministry sees growth remaining moderate

Treasury tackled why Israel's annual GDP growth has fallen from an average of 4.3% between 1991 and 2011 to roughly 3% since 2012.

July 19, 2015 18:31
1 minute read.
Karnit Flug



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Don’t expect Israel’s growth rate to bounce back up to the levels seen last decade. A Finance Ministry study released Sunday concluded that Israel’s moderate economic growth rate is here to stay, at least through the medium term.

The study, released as part of a weekly economic update from the Finance Ministry, tackled why Israel’s annual GDP growth has fallen from an average of 4.3 percent between 1991 and 2011 to roughly 3% since 2012.

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The main drivers of the lower growth, according to the study, were lower labor inputs and a decline in R&D investment.

Israel is near the bottom of OECD rankings on its labor productivity, which the Bank of Israel attributes in part to low levels of investment.

Demographic changes have also affected the labor supply.

Israeli Arabs and ultra-Orthodox Jews, who now account for nearly a third of the population, participate in the labor force in much lower rates than secular Jews, and on average have lower levels of education and skills.

Other problems have also contributed to slower growth.

One of them was an increase in direct taxes. Another has been increased defense spending, which pulls money away from other forms of spending that can boost the economy. Both, the study found, were drags on Israel’s economic growth.

The Finance Ministry predicted that Israel’s rank among OECD countries for GDP per capita will fall two spots from its current position of No. 18 by 2030 if trends do not improve. A 3% growth level implies a 1.4% annual increase in GDP per capita.

That would need to increase to 2% per capita growth if Israel is to be ranked in the top 15.

The central bank has cited a decline in exports as a central cause for moderating growth.

In a June speech, Bank of Israel Governor Karnit Flug said exports were the “productivity driver” of Israel’s economy (mostly because export-oriented industries face stiff global competition, so they must be very productive to compete).

“The troubling facts are that after the recovery from the crisis, goods exports more or less have maintained a fixed level since 2011, and growth of services exports stopped around 2012,” she said.

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