The 2007 Caesarea Forum is now being held at a time of prosperity and impressive macroeconomic achievements for the Israeli economy. The rapid increase of the gross domestic product, a decrease in unemployment, a decline in the public debt to GDP ratio, an increase in the current account surplus and in foreign investments, and low inflation, are the main characteristics of Israel’s positive macroeconomic situation. These characteristics also support Israel’s successful integration into globalization processes.
The main challenge of economic policy in the coming years is to provide a response to security needs and to needs in the social sphere (including the war on poverty and upgrading the educational system), along with continuing the growth process and maintaining the strength and stability of Israel’s economy.
Three main factors have contributed to the multi-annual improvement in the economic situation: the continued rapid increase in the GDP and world trade, as well as international capital transactions; relative security calm with regard to the number of terrorist attacks; and the government’s macroeconomic policy.
The combination of maintaining fiscal discipline while continuing structural reforms, and a relatively flexible interest policy aimed at achieving the inflation target, supports economic growth and financial stability. Consequently, there has been a significant decline in the budget deficit and in the public debt to GDP ratio, and these have contributed to a drop in the real interest rate and in Israel’s “country risk.” Despite the achievements, the public debt to GDP ratio remains very high in comparison to the accepted level in countries with an international credit rating similar to Israel’s rating or even lower.
According to the basic forecast scenario presented here, which presumes the continuation of present favorable background conditions, the economy’s momentum of growth will continue in the coming years, though with lesser force than as of recently. This scenario indicates an average growth rate of about 4.3% in GDP during the forecast period (2008-2012), in comparison with an average of about 5% between the years 2004-2007. In addition, the decrease in the unemployment rate is expected to continue, as is the sharp drop in the public debt to GDP ratio – from 87.8% in 2006 to 71.4% in 2012.
Against a backdrop of the expected continued increase in the level of capital, employment, and productivity, the drop in the predicted GDP growth rate reflects the fact that the cyclical factors that operated when the economy pulled out of the recession in the second half of 2003 have run their course.
For the economy to achieve an average annual growth rate greater than 4.3%, the following will be required: an increase in state budget items that support growth, such as investments in infrastructure and R&D, as well as support for an increase in the employment rate and accelerating structural reforms for increasing competition in the economy. Beyond these factors, significant progress in the political process can be expected to produce much higher growth rates than in the basic scenario.
An examination of the way the economy and financial markets have coped with the upsets of the past year (the Second Lebanon War and two crises in the global markets) supports the opinion that the positive developments have increased the economy’s strength and its resistance to shocks. Indeed, the reactions in Israel’s capital market and foreign currency market were moderate compared with other countries. Without the positive macroeconomic infrastructure of the past few years, it is reasonable to assume that the shocks would have led to substantial capital export, financial instability, and real economic damage.
The phenomenon of the revaluation of the shekel (mainly against the dollar) reflects, to a large degree, the achievements of the economy in the past years, but also the developments in currency markets around the world. On the macroeconomic level, the real reva