Sluggish Productivity Threatens Israel's Growth Prospects: Study

(Bloomberg) -- Behind Israel’s robust economic growth lies a darker side: productivity has grown slowly over the past two decades, threatening a years-long economic expansion and rising living standards, a new report warns.

“There are very real concerns regarding the sustainability of these trends, even over the next few years,” the Taub Center for Social Policy Studies in Israel said in a report released Wednesday.

Israelis’ household income and consumption have grown significantly in recent years, even as price levels have remained stagnant since 2014, likely in part because the government took steps to lower living costs following mass protests in 2011.

Israel’s annual real gross domestic product growth has beaten advanced economies’ since 2004, while its annual inflation rate has been lower since 2014, according to the International Monetary Fund.

Productivity gains have lagged, however, hampering the standard of living. Per capita economic growth was just 1.3% in 2018, compared to a 2.2% average for the developed economies in the Organization for Economic Cooperation and Development, the report said. Factors hampering productivity range from the worst traffic in the developed world and regulatory barriers to business, to a lackluster school system.

The Bank of Israel has warned repeatedly in recent years that Israel must change its budgetary priorities to boost productivity.

“The key to narrowing gaps between Israel and other Western countries is to continually improve labor productivity,” the Taub Center report said. “Demographic changes and improvements in labor participation rates alone will not allow for continued growth at the current rate.”

Future growth also could be harmed by a departure from fiscal discipline amid the government’s widening budget deficit, the report said. Israel’s credit rating is liable to decline as a result, raising financing costs and hurting economic expansion, it said.

To contact the reporter on this story: Ivan Levingston in Tel Aviv at ilevingston@bloomberg.net

To contact the editors responsible for this story: Lin Noueihed at lnoueihed@bloomberg.net, Amy Teibel, Michael S. Arnold

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