Israel's Economic Prospects Robust But Poverty High, IMF Says

(Bloomberg) -- Israel’s economy is thriving and will continue its robust performance in the near future, but unless poverty is alleviated among ultra-Orthodox Jews and Arab citizens, growth and stability could be compromised further down the road, the International Monetary Fund said in its annual report.

The Washington-based fund also warned that Israel’s 2018-19 budgets leave the deficit too high, at 2.9 percent of gross domestic product. Adhering to the former 2019 target of 2.5 percent “would entail little drag on growth at a time of full employment, and would reduce the general government deficit to around 3 percent of GDP,” it said.

Israel’s economy grew 3.4 percent in 2017 and unemployment in February dropped to 3.7 percent. At the same time, the Bank of Israel and other economists have warned that productivity has been compromised by the need to invest more heavily in education, vocational training and infrastructure, and to cut red tape.

The IMF sounded similar themes.

“The economic outlook is favorable in the near term, but challenges will increase over time,” it said. Relative poverty is the highest in the OECD, partly owing to lower average labor market skills and labor force participation among ultra-Orthodox Jews and Israeli Arabs, whose share of the working age population is rising, it said.

“Sizable” infrastructure needs will “increasingly drag on productivity,” and reducing bureaucracy is “critical,” it added.

The IMF also said:

• Monetary policy was “appropriately” accommodative in 2017 and should remain so to entrench the inflation environment within the government’s target range of 1 percent to 3 percent; inflation has been near or below zero for almost four years.
• While Israel’s banking system is “healthy,” it’s “urgent” to approve a financial stability committee to guard the sector against the potential for new risks to emerge from greater competition.
• Slowing housing construction despite still-high housing prices requires continued reforms to make supply more responsive to needs and to improve affordability.

To contact the reporter on this story: Amy Teibel in Jerusalem at ateibel@bloomberg.net.

To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net, Mark Williams, Michael S. Arnold

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