Flug: Unemployment expected to rise

The jobless rate will likely come up from its 20-year low of 6.1% in the third quarter.

Karnit Flug 370 (photo credit: REUTERS)
Karnit Flug 370
(photo credit: REUTERS)
Bank of Israel Governor Karnit Flug expects Israel’s impressively low unemployment rate to rise in the coming year, she said Tuesday at the Calcalist Capital Markets Conference.
Falling export pulled GDP growth in the third quarter down to 2.2 percent, a figure Flug called “disappointing.”
Moderate global growth figures and the expectation that a full percentage point of Israel’s projected 3.6% growth for the year comes from natural gas, which does not create jobs in the short term, the jobless rate will likely come up from its 20-year low of 6.1% in the third quarter.
“An assessment of the composition of the labor market shows that growth in the number of employed persons is concentrated in the public services, while employment in the business sector has been at a standstill for a long time,” Flug said.
The bank is trying to balance several conflicting goals with its monetary policy. It has brought the interest rate down to 1% to help slow the shekel’s appreciation, which hurts exports, and spur growth. However, the low rate also increases demand for housing, which has become too expensive for many Israelis in recent years.
Long-term economic effects of monetary policy are also important factors, Flug said.
“It is important to note that our foreign- exchange policy takes the longterm economic forces into account, and we are acting to give the business sector time to adjust to the trends derived from these forces,” she said.
Speaking earlier in the day, Finance Minister Yair Lapid reiterated his belief that Israel could again grow at levels of 5% annually for the next decade. The disappointing recent figures were not representative of Israel’s economic path, he said.
“I know that in the last quarter there was a drop in exports that led to reduced growth, but this is not a trend,” Lapid said at the Sderot Conference. “We already have more updated data that shows that in September exports grew at 5%, and in October they grew another 6%, so the growth numbers are coming back.”
The OECD on Tuesday lowered its forecast for Israel’s growth this year to 3.7% from 3.9%.
“The fiscal consolidation programmed in the 2013-14 budget should not be diluted, despite favorable surprises in revenues and spending growth,” the report said, adding that the interest rate should slowly come back up once the global recovery gains steam.
It also revised global growth projections downward by just under a half-percentage point for both this year and next, to 2.7% and 3.6%, respectively.
Flug called upon the government to create a strategic plan that would grow the economy it in a way that reduces inequality.
“The main challenge facing the Israeli economy over the long term is to succeed in creating inclusive growth,” she said.
Such growth would “support a higher standard of living for all sectors and a reduction of poverty and inequality in the distribution of income,” Flug said. It would help lower-skill workers find jobs as the economy changes, she said.
“It is important that, in formulating its strategic plan for the coming years, the government focus its policy such that we progress in this direction,” Flug said. “Inclusive growth will contribute to strengthening the cohesiveness among various population groups and within the groups themselves.”