The Bank of Israel today published its annual report summarizing 2015. The report indicates that the high-tech engine has stalled, productivity is stagnating, and real estate is racing ahead. Positive aspects of the report included private consumption, employment, wages, a decrease in debt, and lower energy prices that saved $5 billion.
2015 is likely to be remembered as a year in which the high-tech engine, which carried Israeli exports on its back in recent years, ground to a halt. "It is possible that the sector's potential for quick growth has been exhausted, now that major international companies have already opened research and development centers in Israel," the Bank of Israel's economists write. Another factor cited as a constraint on the sector's development is the high salaries paid to high-tech workers, which are among the highest in the world.
The Israeli economy grew 2.6% in 2015, about the same as in the two preceding years. Population growth in Israel was a fairly high 1.8%, and productivity grew by only 0.5%, compared with 1.5% in the OECD countries, meaning that Israel is lagging behind the developed countries in per capita GDP - the main indicator of a country's wealth.
This constitutes an alarming reversal of the trend in 2006-2013, when Israel narrowed the gap between its productivity and the OECD average from 25% to 15%; this gap has widened since 2013, and now stands at 17%.
Over the past three years, growth in Israel has relied almost exclusively on private consumption, which was up 4.9% in 2015, the highest rate since 2007. Israel's entire 2.6% growth in 2015 is attributable to the growth in private consumption, which offset the negative effect of the decline in exports and investment.
The negligible interest rate, the rise in disposable income caused by higher wages, and the drop in energy and commodity prices contributed to the spurt in private consumption. The wave of terrorism that began in the fourth quarter of the year had virtually no effect on domestic macroeconomic activity, in contrast to similar security events in the past, for example the al-Aksa intifada, which lowered GDP by an estimated 4% in 2001-2002, and Operation Protective Edge, which pushed 2014 growth down by 0.3%.
Exports, formerly the economy's growth engine, pushed growth down in 2015, together with investment. A large proportion of the weakness in exports and investments is attributable to weakness in the global economy and a slowdown of growth in world trade. This year, however, it appears to the Bank of Israel that some of this weakness was the result of local factors.
Exports were down 1.3% in 2016. Exports of goods (still 60% of total exports) dipped 1.1%. Exports of tourist services, which have not recovered since Operation Protective Edge in 2014, slid 0.9% in 2015, and agricultural exports dropped 11%. The most worrisome change, however, was in exports of services, which sank 2.5% in 2015, after growing by an annual average of 11% in the preceding years.
"The decrease in exports of business services was particularly prominent in the high-tech sectors, especially exports of research and development services, areas featuring a high proportion of added value," the Bank of Israel economists write, adding, "This year, quite exceptionally, exports of services from Israel grew at the lowest rate in the OECD. This may indicate growth constraints on the supply side - particularly a shortage of labor with the high qualifications required in these sectors."
Another possible explanation mentioned by the Bank of Israel is that the companies that export advanced services could be competing for expert personnel with startups, which may have attracted employees, thereby reducing the supply of trained employees available to the exporters. Investment in startups grew by 0.2% of GDP in 2015 (an amount equivalent to the drop in exports of business services). It should be noted that such a process only changes the composition of GDP from exports to investment in startups, without causing a decrease in total GDP.
Published by Globes [online], Israel business news - www.globes-online.com - on April 3, 2016
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