Bank warns: Economic slowdown without ultra-Orthodox, Arab integration

These processes, however, have been exhausted in recent years, as the rate of education and employment among non-ultra-Orthodox Jews is already high in comparison to other Western countries.

March 28, 2019 15:51
3 minute read.
Bank warns: Economic slowdown without ultra-Orthodox, Arab integration

Ultra-Orthodox Jews work in the trading room of Israel's diamond exchange in Ramat Gan near Tel Aviv October 30, 2012. Diamond manufacturing is a dwindling trade in Israel. The country has one of the world's hottest diamond exchanges, but polishers and cutters of the precious stones have been replac. (photo credit: NIR ELIAS / REUTERS)


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Israel’s economic growth is forecast to significantly slow down in the coming decades if the country fails to integrate ultra-Orthodox men and Arab women into the nation’s workforce, the Bank of Israel has warned.

The pace of growth is predicted to decrease from an average of 3.3% between 2000 and 2016 to 2.7% between 2017 and 2035. Growth is then expected to fall to 2.2% between 2036 and 2065.

The key factor behind the predicted slowdown, the Bank explained in the latest chapter of its annual report published on Wednesday, is the decline in the growth rate of the working population (ages 25-64), which has decreased at a faster rate than the decline in growth of the general population. The trend is expected to continue.

An additional factor for the slowdown is the decline in the growth rate of worker education. The scope of education, the bank said, increased rapidly since the mid-1990s due to the establishment of academic colleges, and the employment rate also increased, partly due to the increased integration of women in the workforce.

These processes, however, have been exhausted in recent years, as the rate of education and employment among non-ultra-Orthodox Jews is already high in comparison to other Western countries.

Today, the potential for further growth in the Israeli workforce, the bank stated, “lies primarily in the employment rate of Arab women and ultra-Orthodox men.”

Current integration of these population groups is low in comparison to the rest of society, and measures leading to greater participation on their part could have a significant effect on future economic growth.

The bank’s current economic forecast relies on the assumption that the government will implement policies leading to employment rates of Arab women and ultra-Orthodox men continuing to increase at a similar rate to the last two decades.

In a more pessimistic scenario caused by weak employment integration policies, the bank added, the two population groups will maintain their current level of integration, leading to a 6% decrease in workforce representation and a 6% decrease (NIS 8,000) in gross domestic product (GDP) per capita.

A more optimistic scenario based on changes in the education system of the two sectors, however, sees a 3% increase in workforce representation and a 3% growth (NIS 4,000) in GDP per capita.

In order to realize the most optimistic of the three forecasts, the bank called on the government to implement consistent policies in education, welfare and employment to ensure the integration of all population groups into the workforce.

In particular, the government must tackle the low level of mathematics and reading comprehension ability of ultra-Orthodox men compared to non-ultra-Orthodox Jews, with the gap especially pronounced in the case of young ultra-Orthodox men.

Improved basic literacy and mathematics skills among the male ultra-Orthodox population is especially important, the bank said, as their percentage of the population is expected to increase from 3.6% in 2015 to 11.5% by 2065. Ultra-Orthodox men are predicted to constitute one-quarter of the working age population by 2065.

While the bank’s long-term forecasts may provide cause for concern, the Israeli economy received a welcome boost earlier this week when leading credit agency Fitch Ratings affirmed Israel’s long-term foreign-currency issuer default rating (IDR) at A+ with a stable outlook.

Israel’s sovereign credit ratings, Fitch stated, “balance strong external finances, robust macroeconomic performance and solid institutional strength against a government debt/GDP ratio that is high relative to peers and ongoing political and security risks.”
While Israel’s public finances remain relatively weak compared to other A-category nations, the country boasts low external debt (7.7% of GDP) and high financing flexibility.

Israel’s macroeconomic performance, the credit agency added, has been “impressive,” citing GDP growth of 3.3%, low unemployment, wage growth and low inflation.

While Israel’s credit rating is constrained by political turbulence and regional security risks which have the potential to negatively affect the economy and public finances, Israel’s balance sheet is boosted by its strong external creditor position and natural gas sector development.

Welcoming the affirmation, Finance Minister Moshe Kahlon cited the rating as further evidence of the “tremendous power of the Israeli market and economy.”

“A sane economy serves both society and its citizens, not just the privileged and the well connected,” said Kahlon.

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