Governor of the Bank of Israel Karnit Flug is concerned about the global growth rate and poor educational achievement and low productivity in Israel. "Global growth is moderate, and will remain so in the coming years according to the forecasts. Global trade, the most representative indicator of global demand affecting the Israeli economy, grew much more rapidly than global GDP up until the global financial crisis. In recent years, however, it has been growing at the same pace as global GDP, and in 2016, for the first time in many years, growth in world trade fell short of global GDP growth," Flug stated today at the Industry Conference.
The Bank of Israel, which has been following a very expansive policy in recent years, with the interest rate falling to 0.1% and remaining there for the past 21 months, believes that the interest rate will remain at its current level at least until the end of the year in order to counter the moderate global growth rate, revitalize the Israeli economy, and reach the 1-3% government inflation target. The Bank of Israel has not been able to hit this target; inflation in 2016 is expected to be negative or close to zero.
Flug explained that the Bank of Israel had purchased $6 billion in foreign currency in 2016 in order to counteract a 5% shekel appreciation and offset the effect of natural gas production on the balance of payments. "The foreign currency purchases protect Israeli manufacturers against long-term damages liable to result from the temporary element in shekel appreciation caused by the very expansionist monetary policies pursued by the central banks in some of our trade partners," she said.
Flug made it clear, however, that the positive effects of the expansive monetary policy and foreign currency purchases on industry apply only to the short term. "Monetary policy cannot and is not designed to act against structural changes in the Israeli economy and long-term trends in the global economy," she declared.
Flug later commented on the factors detracting from long-term growth that an expansionist monetary policy has difficulty overcoming. She said that the drop in exports of goods and low productivity were two of the main factors encumbering growth and industry.
With respect to the causes of low productivity, Flug explained, "The business environment in Israel is unfriendly as a result of excessive and ineffective regulation; per employee human capital, which reflects relatively low investment; and inadequate human capital, as reflected in various indices of the level of basic expertise required for effective functioning in the labor market."
Flug also argued that the low level of education was one of the prominent causes of low productivity. "In human capital, the even more alarming news is that today's educational system promises no improvement in the situation when today's students reach the labor market. Educational achievement is poor in all aspects by international comparison, and the gaps between students from different socioeconomic backgrounds and different population groups are very wide."
Published by Globes [online], Israel Business News - www.globes-online.com - on January 12, 2017
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