Remarks by the Director of the Research Department at the “End of 2017” Economic Conference held by Brit Pikuach MBT Accountants
- The global growth forecasts were recently revised upward. Accelerated activity, which is characteristic of the advanced economies and now also of the emerging economies, supports the increase of Israeli exports.
- The global crisis that took place toward the end of the last decade harmed exports and activity in the construction industry in the advanced economies, while in Israel, the construction industry continued to expand. Despite the gradual recovery, the processes of increasing employment in the advanced economies have not yet been exhausted, while in Israel, employment increased gradually and the labor market is now close to full employment.
- A comparison of the labor market indicators in Israel to the OECD average shows that the unemployment rate in Israel is lower, the rate of forced part-time employment is lower, the job vacancy rate relative to the number of unemployed is higher, and the rate of wage increases is higher.
- Wage increases have not yet been translated into an increase in the inflation rate in Israel. The inflation rate remains low as a result of the appreciation of the shekel, increased competition and changes in consumer behavior, and one-time price reductions made in recent years.
- With the current state of the economy, the government is not currently required to adopt an active macroeconomic policy through the budget. In particular, it is preferable to avoid initiated tax reductions that may increase the budgetary deficit in the coming years.
In the past few months, investment houses around the world have revised the growth forecasts for 2018 upward, and the improvement is expected in both advanced economies and emerging economies. For instance, in the eurozone, which has lagged behind in emerging from the crisis, the growth forecast was raised by 0.4 percentage points, and growth in 2018 is expected to be 1.8 percent. These revisions enable the assessment that the increase in demand for Israeli exports will lead to continued growth in Israel as well, after a 4 percent GDP growth rate in annual terms in the third quarter.
While the advanced economies were hit hard by the global crisis toward the end of the last decade, due to the combined decline in exports and investment (particularly in the construction industry), Israel came through the crisis more smoothly, due to the financial system’s robustness and the continued growth in activity in the construction industry. As a result of the continued growth, employment in Israel increased and came close to full employment. A comparison of labor market indicators shows that the employment situation in Israel is better than the OECD average in most parameters: the unemployment rate is lower, the rate of forced part-time employment is lower, the job vacancy rate relative to unemployment is higher, and the rate of wage increases is higher.
We could have expected that the increase in wages and the proximity to full employment would lead to an increase in the rate of inflation, but that has not actually happened due to the appreciation of the shekel, increased competition in the market, and price developments initiated by the government in various areas such as vehicle insurance, water and telephony.
With the economy’s proximity to full employment, we can make the assessment that no special measures are required in the budget in order to encourage economic activity, since such activity has been on a path of continued expansion. Despite the fact that the deficit is currently below the target set in the budget, initiated tax reductions will lower tax rates permanently, thereby making it difficult to meet the deficit target in the coming years. In addition, tax reductions in a state of full employment are expected to have a relatively small effect on economic activity.