A Macroeconomic Picture of the Economy in 2017

The past year was characterized by an increase in employment and real wages, and a decline in the unemployment rate, which is at a historic low. However, per capita growth in Israel is low relative to other countries, and labor productivity growth has stagnated.

GDP is expected to grow by 3.1% in 2017, a rate that translates into a growth of about 1.1% in GDP per capita. These figures are lower than last year’s growth (which stood at 4.0% GDP growth and 1.9% GDP per capita growth), but is similar to the growth rate in recent years. All of the signs indicate that Israel’s economy is in a state of near full employment, and therefore that the current growth rate probably reflects its long-term growth trend, rather than changes in the business cycle.

• The increase in employment rates alongside the rise in average real wages led to an impressive increase in consumption in recent years, and consequently an increase in the standard of living.
• Consumption prices in Israel are significantly higher than in other developed countries, but there appears to be a change for the better, and there are signs that prices are to some extent in a process of adjusting to the level of other developed countries.
• Despite the encouraging data, it seems that in the long term, employment growth is reaching its upper limit and that wage growth is due to a temporary improvement in the trade conditions in the economy, and not from an increase in productivity. This raises concerns that the rapid increase in private consumption will not last for long, and that the country will need to find other sources of growth to narrow the gap between the standard of living in Israel and other developed countries.
• Housing prices continue to rise at a faster rate than rental prices, thus the return on owning an apartment is further declining. Since interest rates have remained at their current level for the past two years, it appears that the recent rise in housing prices mainly reflects expectations of households and investors that both apartment prices and average rents will continue to rise in the future.