Israel's strong economic growth, which was hardly dented by the Second Lebanon War, could be threatened by security threats and a downturn in the world economy.
"Despite the positive and favorable fundamentals of the Israeli economy and in view of Israel's high level of public debt-to-GDP ratio, the country's economy could still be vulnerable and be hit harshly by negative shocks caused by continued deterioration of the security situation and a slowdown in the global economy," according a study by leading economists that will be presented at the annual Caesarea Forum in Haifa next week.
"The combination of these two shocks is the only macroeconomic risk that could threaten the economy in coming years. In order to minimize the negative ramifications of these shocks on the economy, fiscal discipline will be the key. Otherwise the economy is in danger of falling back to the mistakes of the past," the economists wrote.
The study examined the country's macroeconomic situation, analyzing risks and challenges and providing macroeconomic forecasts and recommendations looking ahead to the years 2008 to 2012.
The study was prepared by prominent economists, including Prof. Leo Leiderman, chief economist at Bank Hapoalim; Gil Bufman, chief economist at Bank Leumi; Nira Shamir, head of economics at the Israel Manufacturers' Association; and Dr Michel Stravzinsky, deputy head of the research department at the Bank of Israel.
"Strong and fast economic growth, lower unemployment, reduction of the debt-to-GDP ratio, increase of foreign investment and low inflation are the main parameters that characterize the positive picture of Israel's macroeconomic situation," the report reads.
The economists said the main challenge to maintaining the positive momentum was ensuring that future economic policy provided an appropriate answer to security needs and social issues, including the war on poverty and education reform.
The study warned that although the economy had been experiencing great success, the country's public debt-to-GDP ratio was still far too high compared to that in countries with a similar credit rating to Israel.
"Assuming positive fundamentals remain intact, we expect the economy to grow at an average growth rate of 4.3 percent in 2008 to 2012, compared with average GDP growth of 5% in 200 to 2007. At the same time, Israel's 87.8% debt-to-GDP ratio in 2006 is expected to come down to 71.4% in 2012," the economists wrote. "For the economy to grow by an average of 4.3%, the state budget would need to be modified to release funds that help catalyze engines of growth such as investments in infrastructure, research and development, employment opportunities and structural reforms to increase competition."