"Have exports, formerly regarded as the growth engine of the Israeli economy, been replaced by domestic demand, given the rising global isolationist trend?", the Ministry of Finance chief economist Yoel Naveh wonders in a review published today focusing on private consumption in Israel. He finds that the proportion of private consumption in GDP and its contribution to growth is become ever more significant, and he therefore examined its trends, origin, variance according to income level, sources of financing, and permanence.
According to his review, the lower income deciles consume more, but pay for it by increasing their debt by taking credit from banks.
In his review, the chief economist states that he found that the rapid rise in private consumption in recent years had not led to a significant change in its proportion of GDP, but it is clear that the composition of consumption underwent a significant change during this period. The growth rate in consumption of durable goods has particularly accelerated in recent years, and its proportion of GDP is now at a peak. Current consumption has also been rising, but at a slightly slower pace.
Naveh further finds that the rise in ownership of durable goods traditionally regarded as luxuries was greatest among the economically disadvantaged. This finding is consistent with previous studies conducted by the chief economist's department, which showed a more rapid increase in consumption by households in the lower income deciles. This pattern may also mean that growth is reaching poor people and narrowing gaps between different population groups in Israel.
Minister of Economy and Industry Eli Cohen said today, "50% of the population in Israel earns less than NIS 7,000 a month. This is the approximate median income," indicating that, contrary to the Ministry of Finance's claims, growth is not extending to the economically disadvantaged.
The Ministry of Finance says that the primary causes of these trends in private consumption have been negligible interest rates, which lower the cost of consuming today at the expense of the future, and the state of the labor market, where full employment has contributed in recent years to both an increase in purchasing power and a feeling of security about people's future income. These trends may also reflect a change in the consumption standard, meaning an increase in the standard of living among Israeli consumers.
At the same time, the source of financing for the sustained improvement in private consumption is a less positive signal - an increase in household debt. In recent years, household credit has grown at the same rate as in the years preceding the sub-prime crisis in the US, which was preceded by high levels of leverage among the public in many developed countries.
Household credit grew by 7.5% in 2016, while non-housing credit grew by an even faster 9%. The rapid rise in household credit for non-housing purposes has continued for the past three years, the same annual growth as in the years preceding the sub-prime crisis.
The chief economist department's medium-term forecast assumes that the relatively low interest rate environment will persist, that unemployment will remain low, and that the inflation rate will continued to gradually rise. The forecast says that these factors support continued growth in private consumption.
Published by Globes [online], Israel Business News - www.globes-online.com - on June 5, 2017
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