IWS Documented News INTERNATIONAL

·         Overview of the Economic Survey of Israel 2011 

·         Associated Working Papers

Israel’s economy passed through the 2008-09 global downturn in relatively good shape but is now suffering alongside others from the continuing effects of the renewed global crisis, and geopolitical tensions have increased. Annualised quarter-on-quarter real GDP growth was 4.7% in the first quarter but had slowed to 3.4% by the third quarter. Much of the slowdown came from a deceleration in export growth, as world trade slowed significantly. The November 2011 OECD Economic Outlook 90 has real GDP growth at 4.7% in 2011 but less than 3% in 2012. All private expenditure components, domestic and foreign, should contribute to the slowing.

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Early signs of weakness in the housing market may presage an imminent sharper-than-desired decline in prices. In monetary policy currency intervention has become somewhat less relevant recently as reduced growth prospects and falling inflation led the Bank to leave its policy rate unchanged from June to September and lower it for October. So far there have been no major failures in the financial sector but corporate bond markets remain a major concern, there is room to improve financial supervision, planned legislation to allow securitisation should proceed cautiously and the framework for saving in institutional funds could be improved.

Israel has avoided the challenging fiscal situation facing a number of other OECD economies. Nevertheless, there remain sharp trade offs in fiscal policy objectives between debt reduction, spending control and tax reform, which have been heightened by pressures from the recent wave of popular protests. Debt reduction should remain the top priority but also faster spending growth under the new fiscal rule is welcome. Therefore, ensuring revenues remain on track in the longer term remains a core challenge. This said, there has been an innovative shift to a two-year budget cycle and a significant improvement in the fiscal treatment of hydrocarbon resources.

Persistent weaknesses in per capita income growth and a high rate of poverty, especially among certain communities, remain key long term challenges for education and welfare policies. In addition, middle-class concerns have surfaced in the form of the recent ‘tent protests’, with complaints about the cost of housing and price levels in other sectors figuring prominently. There has been some good news in the latest PISA results and reasonable progress in education reform but a lack of progress in making employment and social policies more effective. In housing, tax settings excessively favour home ownership and housing support schemes extend well beyond assistance to low-income households.

The tent protest concerns are linked to debate about the level of competition in the economy and the role of Israel’s large family run business groups, which play a significant role in the financial sector and in many non-financial sectors too. Also, in the energy sector sluggish reform in electricity and concerns about competition in natural gas are a cause for concern.

Environmental issues arising from the production and use of energy are prominent. Israel’s greenhouse-gas emissions and related air pollutants are largely the result of electricity production and energy use in transportation. Significant emissions reductions are expected from an energy efficiency programme. Plans are also being implemented that aim to raise the contribution of renewable electricity generation. There is a need for better public transport and further development of vehicle taxation.

Associated Economics Department Working papers:

How to improve the economic policy framework for the housing market in Israel, (No. 912) by Philip Hemmings

Issues in private-sector finance in Israel, (No. 913) by Philip Hemmings

Addressing challenges in the energy sector in Israel, (No. 914) by Philip Hemmings