Bank of Israel Governor Karnit Flug presented a positive overview of the country’s economy on Wednesday (March 28, 2018) but said Israel still faces challenges in reducing poverty and narrowing the country’s economic gaps.
Presenting the Bank’s annual report for 2017, Flug wrote in a letter to the Knesset Finance Committee alongside the report that the GDP grew by 3.4 percent, and after two years of primarily domestic based growth, 2017 saw a more balanced composition as the growth rate of exports accelerated. She also noted that an increase in world trade and a recovery in tourism had contributed to the acceleration in exports.
Strong demand in the economy was reflected in the labor market: The employment rate continued to rise, and the unemployment rate continued to decline, reaching its lowest level in decades. At the same time, Flug said, tightening of the labor market, due to, inter alia, a slowdown in the participation rate in the workforce, had led to an acceleration in the rise of nominal wages.
The inflation rate for the full year was 0.4 percent, which, the Bank noted, while below the lower bound of the inflation target range, was in positive territory for the first time since 2014. The low level of inflation, it said, was primarily due to the appreciation of the shekel, enhanced competition in the economy, the increase in online purchases, and price reductions initiated by the government.
The BOI noted also that the government deficit this year was 2 percent of GDP, lower than both the previous year’s deficit and the ceiling set in the budget. Flug said this was due to higher-than-expected tax revenues, primarily due to one-off revenues. The ratio of public debt to GDP continued to decline, reaching 60.8 percent of GDP at the end of the year.
“While the government accelerated the growth in its expenditure this year and the share of civilian expenditure in GDP increased, it remained very low compared to most OECD countries,” Flug said.
Flug noted that home prices had increased this year at a rate slower than in previous years, and the number of transactions continued to decline. Contributing to this, she said, were measures adopted by the government in recent years to increase supply and to reduce investor demand. She called on the government to continue to create conditions that allow a high level of supply, particularly in areas of high demand, and for it to utilize the potential inherent in urban renewal.
Narrowing the gaps between Israel and other advanced economies in terms of GDP per capita and labor productivity, and in terms of incidence of poverty and net-income inequality, are two of the main challenges facing policy makers, Flug said.
The BOI governor said in order to overcome those challenges Israel needs to improve the human capital of the overall population and reduce gaps among its various groups. To that end, she added, achievements in the overall education system should be improved, and gaps in achievements between students from various population groups and socioeconomic and geographic backgrounds should be reduced.
Flug warned that in a highly competitive global environment, Israel will not be able to maintain its competitive edge without consistent improvement in its human capital, and that without an improvement in the achievements of students from all backgrounds, various population subgroups would not be able to participate in advanced industries and benefit from the high wages they offer.