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Israel - Economy

High prices have created a widening gap between rich and poor, which was an issue in the 2015 election. The center-left campaigned on social and economic issues, surging in polls as election day neared.

Wages are low in Israel compared to Western countries, but prices are often higher. Owning a car in Israel is extremely expensive. For instance, in 2011 gasoline cost $2.20 a liter. A modest apartment in Jerusalem or Tel Aviv cost $500,000, yet the average salary in Israel was about $2,500 a month. Teachers and civil servants typically earned less than $2,000 a month. Urban centres are more expensive than desert outposts or mountain towns; with Tel Aviv, Israel's most cosmopolitan destination, claiming a cost of living higher than both Paris and Milan. Taxes in Israel are exorbitantly high, with both import taxes and excise taxes leaving buyers bearing the brunt of costs.

Despite rapid growth, the poverty rate in Israel (near 20 percent) remains among the highest in OECD countries. Much of this high poverty incidence is accounted for by Haredi and Arab-Israeli communities. Going forward, given Israels demographic profilein 20 years, the population of these two groups is projected to exceed 40 percent of the total populationtheir integration into the labor force will be essential not only to improve their welfare, but also to boost labor productivity and the longrun growth potential of the Israeli economy as a whole.

House prices have risen sharply. The low interest rate environment and a search for yield have boosted the demand for housing, even as chronic shortages of planned land and delays in the process of obtaining building permits have constrained supply. As a result, house prices have sky-rocketed (an increase of 80 percent in nominal terms since 2007). By early 2015 property prices in Israel were about 25 percent above their equilibrium value, owing largely to low mortgage interest rates and supply shortages. Price-to-income and price-to-rent ratios are well above their equilibrium value. The risk of a sharp correction in housing prices was mitigated by the supply shortages.

This has prompted a wave of protests in 2011. Protesters demanded that the government lower taxes, subsidize housing and bring prices down. Prime Minister Benjamin Netanyahu responded by announcing a string of reforms, such as creating more apartments for students and selling state-owned land at a discount to lower the price of housing. But housing was only one issue. Food prices have skyrocketed and doctors were striking in 2011 for higher pay and better conditions.

The economy is growing at a moderate pace. Abstracting from the impact of new large-scale natural gas production, GDP growth is estimated to have moderated to about 2 percent in 2013, owing in large part to weak investment and exports. Some pick up was expected in 2014, but the underlying momentum was weaker than before. Despite notable progress, Israels public debt (68 percent of GDP) remained high, while continued house price increases posed risks of a boom-bust cycle in the housing market. Policy priorities. The key policy challenge was to maintain near-term growth at potential, while preventing the build-up of imbalances, strengthening resilience to shocks, and ensuring long-term sustainability.

Israel has been exposed to a series of shocks, including the global crisis and heightened geopolitical tensions in the Middle East. Nevertheless, GDP growth averaged 4 percent over the five years up to 2012, compared with 0.7 percent on average for OECD countries. The overall living standards continue to improve gradually, with per capita real GDP growing more rapidly than in other OECD countries. There is concern that unless large employment and productivity gaps, particularly between the general Jewish and the Israeli-Arab and Ultra-Orthodox Jewish (Haredi) populations, are addressed, growth potential would slow significantly in the long-run.

The fundamentals of the Israeli economy are strong, and the economy proved flexible and adaptable through the worldwide financial crisis. With low inflation, relatively low unemployment, and fiscal deficits that have usually met targets, Israeli Government economic policies are considered by most analysts as generally sound and supportive of growth. The Government continues to take actions to remove trade barriers and encourage capital investment, including foreign investment. Israel seeks to provide supportive conditions for companies looking to invest in Israel, through laws that encourage capital and industrial R&D investment.

Israel has a diversified, technologically advanced economy with substantial but decreasing government ownership and a strong high-tech sector. The major industrial sectors include high-technology electronic and biomedical equipment, metal products, processed foods, chemicals, and transport equipment. Israel possesses a substantial service sector and is one of the world's centers for diamond cutting and polishing. It also is a world leader in software development and, prior to the violence that began in September 2000, was a major tourist destination.

Israel's strong commitment to economic development and its talented work force led to economic growth rates during the nation's first two decades that frequently exceeded 10% annually. The years after the 1973 Yom Kippur War were a lost decade economically, as growth stalled and inflation reached triple-digit levels. The successful economic stabilization plan implemented in 1985 and the subsequent introduction of market-oriented structural reforms reinvigorated the economy and paved the way for rapid growth in the 1990s.

A wave of Jewish immigration beginning in 1989, predominantly from the countries of the former U.S.S.R., brought nearly a million new citizens to Israel. These new immigrants, many of them highly educated, now constitute some 13% of Israel's 7.2 million inhabitants. Their successful absorption into Israeli society and its labor force forms a remarkable chapter in Israeli history. The skills brought by the new immigrants and their added demand as consumers gave the Israeli economy a strong upward push and in the 1990s, they played a key role in the ongoing development of Israel's high-tech sector.

During the 1990s, progress in the Middle East peace process, beginning with the Madrid Conference of 1991, helped to reduce Israel's economic isolation from its neighbors and opened up new markets to Israeli exporters farther afield. The peace process stimulated an unprecedented inflow of foreign investment in Israel, and provided a substantial boost to economic growth in the region over the last decade. The onset of the intifada beginning at the end of September of 2000, the downturn in the high-tech sector and Nasdaq crisis, and the slowdown of the global economy have all significantly affected the Israeli economy. However, despite the conflicts in Gaza and Lebanon, the Israeli economy grew during 2006.

Israeli companies, particularly in the high-tech area, have in the past enjoyed considerable success raising money on Wall Street and other world financial markets; Israel has approximately the same number of companies listed on NASDAQ as the next three countries (Canada, Japan, and Ireland) combined. Israel's tech market is very developed, and in spite of the pause in the industry's growth, the high-tech sector is likely to be the major driver of the Israeli economy. Almost 45 % of Israel's exports are high tech. Most leading players, including Intel, Motorola, IBM, and Cisco have a presence in Israel.

After growing by an exceptional 9.2% in 2000, growth was negative in 2001 and 2002, as a result of the security situation, global recession and high-tech downturn. Growth returned in 2003, and as a result of the improvement in the security situation and the economic recovery plan undertaken by the Government of Israel, the Israeli economy grew by an average of more than 5% a year from 2004 to 2007. This was followed by growth of 4% in 2008. With the onset of the global financial crisis, the slowdown in the Israeli economy only began in the third quarter of 2008, followed by negative growth of 1.6% in the fourth quarter of 2008 and -3.2% in the first quarter of 2009. Unemployment reached a high of 10.7% in 2003, a level not seen in 20 years, and declined consistently each year until 2008, when it reached 6.1%, the lowest level since 1995.

Trade of goods and services in Israel grew by 6%, 9.3%, and 5.2%, respectively in 2006, 2007, and 2008. Exports declined by a sharp 35.6% in the fourth quarter of 2008 and 28.6% in the first quarter of 2009. Diamond exports alone declined by more than 36% in the fourth quarter of 2008 compared with the same quarter the previous year. Agricultural exports, which increased by 44% in 2007, declined by almost 12% in the fourth quarter of 2008.

The GDP of the business sector grew by more than 6% from 2004 to 2006. In 2007 and 2008 GDP of the business sector increased, although at more moderate levels of 5.6% in 2007 and 4.5% in 2008. The finance and business services sector grew by 25% in both 2007 and 2008. The manufacturing sector grew by more than 14% in both 2007 and 2008 and commerce, restaurants and hotels grew by more than 11% in both 2007 and 2008.

The general consensus among economists is that Israel entered the global economic crisis in relatively good shape. Because the GOI maintained conservative policies during the crisis and avoided ambitious fiscal spending packages, the Israeli economy is expected to quickly emerge from a shallow recession and return to a path of growth, even if not at levels that were seen prior to the crisis.

The United States is Israel's largest single trading partner. In 2008, bilateral trade totaled $28 billion, an increase of almost 5% over 2007, even in light of the slowdown in global trade. The U.S. trade deficit with Israel was $11.9 billion in 2008, including diamonds. Excluding diamonds, the trade deficit was $4.5 billion in 2008. Israel is our 20th largest export market for goods. The principal goods exported from the U.S. include civilian aircraft parts, telecommunications equipment, semiconductors, civilian aircraft, electrical apparatus, and computer accessories. Israel's chief exports to the U.S. include diamonds, pharmaceutical preparations, telecommunications equipment, medicinal equipment, electrical apparatus, and cotton apparel. The two countries signed a free trade agreement (FTA) in 1985 that progressively eliminated tariffs on most goods traded between the two countries over the following 10 years. An agricultural trade accord signed in November 1996 addressed the remaining goods not covered in the FTA but has not entirely erased barriers to trade in the agricultural sector. Israel also has trade and cooperation agreements in place with the European Union, Canada, Mexico, and other countries.

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Page last modified: 25-03-2015 19:19:11 ZULU