Israel’s Economic Outlook and Financial Policy Settings: the View

from the OECD

Peter Jarrett

Presentation to the Globes Business Conference11 December 2011

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Better-than-average GDP growth

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Year-on-year percentage change

Domestic demand remains robust

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Year-on-year percentage change

Investment is still buoyant

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Year-on-year percentage change

The labour market is performing well

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Per cent

The output gap is near zero

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Deviation from GDP trend (%)

External trade is weakening

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Year-on-year percentage change

But unexceptional per capita GDP performance

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Gap to the upper half of OECD countries

And very high and rising poverty rates

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Short-term economic outlook

1. Contributions to changes in real GDP (percentage of real GDP in previous year). 2. As a percentage of GDP. 3. Excluding Bank of Israel profits and the implicit costs of CPI-indexed government bonds.

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2007 2008 2009 2010 2011 2012 2013Current prices Percentage changes, volume (2005 prices)

NIS billion

Real GDP 686.5 4.0 0.8 4.8 4.7 2.9 3.9

Total domestic demand 696.7 2.1 -0.2 4.7 7.2 3.2 4.2

Export of goods and services 291.3 6.6 -11.9 13.6 4.8 3.9 7.8

Imports of goods and services 301.6 2.2 -14.0 12.8 12.7 5.2 8.3

Net exports1 -10.2 1.8 1.0 0.6 -2.7 -0.6 -0.4

Memorandum items:

Consumer price index - 4.6 3.3 2.7 3.5 2.0 2.1

Unemployment rate - 6.1 7.6 6.6 5.6 6.0 5.8

General government financial balance2,3 - -3.8 -6.4 -5.0 -4.0 -3.8 -3.5

General government gross debt2 - 77.0 79.4 76.0 74.6 73.8 72.4

Current account balance2 - 1.1 3.5 3.0 -0.8 -1.4 -1.7

Inflation outcomes and policy rates

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Year-on-year percentage change in prices

The exchange rate and currency purchases

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Foreign exchange reserves are high

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Per cent of GDP

Only business debt has been rising

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Banks have shifted to housing loans

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The expansion of the corporate bond market

1. Left axis

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Banking-sector risk and capital adequacy

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Net pension replacement rates1

1. The simulation assumes individuals starting full-time careers at age 20.2. Unweighted average.3. OECD average excluding highest ten.

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Highest ten OECD countries and Israel, including second-pillar pensions

Some other financial-sector advice

• Take further macro-prudential actions if the housing market does not manage a soft landing

• Strengthen co-ordination in financial supervision• As regards specific financial products:

Proceed cautiously with securitisation Regulate bond markets more strictly if fragilities persist Reform taxation of second-pillar pension saving Do not raise mandatory pension provisions any further

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Influential business groups are not unusual

The stock-market share of the 20 largest family/business groups

Thank you!

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