Market Study Israel. Forecasting Israel´s GDP Growth

Term Paper, 2016

37 Pages, Grade: 2,7


Table of content


1 Introduction

2 Israels Real GDP
2.1 Data
2.2 Business Cycle
2.3 Leading or lagging Indicators

3 Forecast assumptions
3.1 Oil Price
3.2 Exchange Rate
3.3 Business cycle US

4 Business Cycle forecast
4.1 Introduction
4.2 Our approach
4.3 Methodology
4.4 Evaluation Results
4.5 Final Forecast
4.6 Forecast Values and forecast Comparison
4.7 Conclusion:

5 Risk analyisis

6 Biblography

List of tables

Table 1: Israel GDP data – Source: Israel’s central bureau of statistics.

Table 2: Hodrick-Prescott filtering on Israel’s GDP data 1995-2015 – own illustration

Table 3: GDP indicators and respective growth rate:

Table 4: From Input Sample Data calculated Output Sample forecasts

Table 5: Regression statistics for the AR(1) evaluation model

Table 6: Regression statistics for the AR(3) evaluation model

Table 7: Regression statistics for the AR(1) forecast model

Table 8: Forecast values for GDP and growth rate calculated with the AR(1) model

Table 9: Forecast values for GDP and growth rate calculated with the AR(3) model

List of figures

Figure 1: Israel’s Real GDP 1995-2015 – own illustration

Figure 2: Israel’s Real GDP growth rate 1995-2015 – own illustration

Figure 3: Israel’s Real GDP vs. HP(GDP) Trend 1995-2015 – own illustration

Figure 4: The Output Gap – own illustration

Figure 5: GDP vs. Imports – own illustration

Figure 6: GDP vs. Exports - own illustration

Figure 7: GDP vs. Unemployment rate - own illustration

Figure 8: GDP vs. Unemployment rate - own illustration

Figure 9: GDP vs. Private Consumption - own illustration

Figure 10: GDP vs. CPI - own illustration

Figure 11: GDP vs. Industrial Production - own illustration

Figure 12: Comparison Real GDP Growth rate with moving average forecast

Figure 13: Comparison Real GDP Growth rate with AR(1) / AR(3) Forecast

Figure 14: Regression Graphic for the AR(1) evaluation model

Figure 15: Regression Graphic for the AR(1) forecast model

Figure 16: GDP forecast graphic calculated with the AR(3) model



The purpose of this seminar paper is to determine Israel’s current economic situation, the economic outlook for the next two years and the mains risks the country is exposed to.

In this paper we evaluate Israel’s current real Gross Domestic Products (GDP) growth rate, current and lagging indicators influencing the GDP growth rate and different forecast models with input sample real GDP data. Finally the model with the best performance to forecast Israel’s real GDP growth will be applied, providing a forecast for the next two fiscal years.

Chapters Overview:

Chapter 1 describes in brief Israel’s economy, following by an evaluation of the current business cycle in chapter 2 by extracting the trend (potential GDP) from the Real GDP, which is based on constant prices on reference period 2010, using the HP filtering method. Then we underline that evaluated cycle by current and leading indicators. In Chapter 3 we take a look to exogenous parameters, and their conditional assumption as basis for the forecast which will be carried out in next Chapter 4. The forecast uses quarterly data for Israel’s real GDP from Q1/1995 to Q4/2015, whereby the data is split in Input sample data section for forecast model output calculation and evaluation data section for comparison of the different models output with real GDP evaluation data. The forecasts from different models are generated using time series approach as benchmark and an autoregressive model for growth estimation and forecast calculation. The different models are evaluated using standard forecast evaluation criteria. Results are discussed.

Finally in Chapter 5 a risk analysis is carried out.

1 Introduction

Israel is a densely-populated country on the eastern shore of the Mediterranean Sea, and is the only state in the world with a majority Jewish population.

The country has been locked in conflict with the Palestinians and its Arab neighbors over ownership of land considered holy by many Jews, Christians and Muslims since its creation in 1948. The division of the former British Mandate of Palestine and the creation of the State of Israel in the years after the end of World War II was the culmination of the Zionist movement, whose aim was a homeland for Jews hitherto scattered all over the world. (BBC, 2016)

Nowadays, Israel it’s an independent state and is located in the middle east, bordering the Mediterranean Sea, between Egypt and Lebanon, it has a total area of 20,770sq km and the land its 20,330sq km. The territory it’s occupied by various ethnic groups such as Jewish 75% (Israel-born, Europe-American born, Africa-born and Asia-born) and non-Jewish 25% (mostly Arabs). The total population of the country is 8,049,319 million people. (CIA, 2016)

Israel has developed from an agrarian state run along collectivist lines into a hi-tech economy in the past 60 years. It has absorbed Jewish immigrants from Europe, the rest of the Middle East, North America and, most recently, the former Soviet Union and Ethiopia along the way. (BBC, 2016)

The economy is very small and very open economy, well integrated in the world economy through trade and capital markets channels. (IMF, 2015) It is therefore affected by events in the global economy. Also Israel it’s a country that has a technology advanced free market economy.

Its leading exports include cut diamonds, high-technology equipment, and pharmaceuticals, among others. Its major imports include crude oil, grains, raw materials, and military equipment. Israel usually posts sizable trade deficits, which are covered by tourism and other service exports, as well as significant foreign investment inflows. (CIA, 2016)

Between 2004 and 2013, growth averaged nearly 5% per year, led by exports. The global financial crisis of 2008-09 spurred a brief recession in Israel, but the country entered the crisis with solid fundamentals, following years of prudent fiscal policy and a resilient banking sector. Banks came through the crisis relatively well, but both the corporate bond market and non-bank financial institutions were hit hard. (IMF, 2015)

The Israel’s uncertain security result in slowing domestic and international demand and decreased investment situation reduced GDP growth to an average of roughly 2.6% per year during 2014-15.

In the long term, Israel faces structural issues, including low labor participation rates for its fastest growing social segments - the ultraorthodox and Arab-Israeli communities. Also, Israel's progressive, globally competitive, knowledge-based technology sector employs only about 8% of the workforce, with the rest mostly employed in manufacturing and services - sectors which face downward wage pressures from global competition.

However, Israel has advanced industrial. Despite limited natural resources, the agricultural and industrial sectors are well developed. (Zanoti, 2015) The Israeli economy is enjoying its 13th consecutive year of growth, demonstrating remarkable resilience. Increases in output, averaging nearly 4%anually since 2003.The country experienced only a mild slowdown in activity in 2014, despite the Gaza conflict, and growth continued in 2015, even if relatively moderate pace. (OECD, 2016)

According to a report of the Bank of Israel, its exports as a percentage of GDP is one of the highest amongst western countries (more than 30% of GDP), and is not based on commodities exports. (Reuter, 2016) The gross domestic product (GDP) rose from just over US$6 billion in 1950 too and estimated $240 billion in 2012 (in 2012 prices and exchange rates). (Looney, 2014) At the end of 2014 the Israeli GDP reached more than 300 billion$.

The growth rate of Israel was 2.6% (2015 est) and it was maintain in comparison to the 2014 2.6%. The GDP per capita is $33,700 (2015 est). This is due to the fact that weaker exports and investment, partly resulting from the appreciation of the currency in 2012, have led to a slowdown in per capita GDP growth. (OECD, 2016) The unemployment rate 5.6% (2015) declined compare to the 2014 5.9%.

Inflation rate (consumers price) -0.6% (2015 est) declined also significantly from the year 0.5% 2014. Foreign exchange and gold reserves $91.61 billion (31dec 2015 est) which is a considerable increase in compare to the $86.1 billion (31 dec 2014 est).

Exports, which are based on machinery and equipment, software, cut diamonds, agricultural products, chemicals, textiles and apparel; had a small reduction from $56.4 billion (2015 est) to 2014 $63.24 billion and imports which are raw materials, military equipment, investment goods, rough diamonds, fuel grain and consumer goods also declined from $58.8 billion (2015 est) in comparison with 2014 $71.2 billion.

The exchange rates (new Israeli shekels (ILS) per US dollar) as we can observe had change and increase from3.5781 (2011 est.), 3.86 (2012 est.), 3.5779 (2013 est.), 3.5779 (2014 est.) and 3.886 (2015 est.) (CIA, 2016)

According to the Central Bureau of Statistics report, export of goods in Israel totaled NIS 16.4B. (CBS, 2016) Israel exports account for one third of GDP, with the United States, Europe and emerging Asia its major trade partners. Israel has a strong comparative advantages in the high-tech industry, which accounts for more than 40 percent of total manufacturing exports.

Exports of goods and services remain crucial element of the economy´s overall performance and competitiveness. (World Trade Organization (WTO), 2016) In 2015 Israel exported $53.7B, making it the 55th largest exporter in the world. During the last five years the exports of Israel have increased at an annualized rate of 5.8%, from $40.5B in 2009 to $53.7B in 2014. Today´s the most recent exports are led by Packaged Medicaments which represent 9.2% of the total exports of Israel, followed by Refined Petroleum, which account for 8.35%. (using 1992 revision of the HS (Harmonized System) classification).

The top exports of Israel are, Package Medicaments ($4.96B), Refined Petroleum ($4.49B), Integrated Circuits ($4.19B), Diamonds ($3.63B) and Telephones (1.57B). Also the mayor destinations for this products are the United state ($11.7B), Palestine ($2.93B), China ($2.89B), Turkey ($2.81B) and the Netherlands ($2.14B).

In a recent report, its stated that the Export of goods as percent of imports (excluding ships, aircraft and diamonds) constituted 75.0% compared to 86.6%, at the same months in 2015. (Bank of Israel) also, the Export of this goods (excluding ships, aircraft and diamonds) decreased by 16.5% at an annual rate in March- May 2016.

Export of goods totaled – as mentioned – NIS 16.4 billion in May 2016. Manufacturing, mining and quarrying exports (excluding diamonds) constituted 72% of all export of goods. Export of diamonds constituted 26%, and the remaining 2% were agriculture, forestry and fishing exports. Export of diamonds (net, polished and rough), in January-May 2016, totaled NIS 14.8 billion compared to NIS 16.1 billion in the same period of 2015. Agricultural, forestry and fishing exports in January -May 2016 totaled NIS 2.4 billion (original data) a decrease of 12.4% compared to the same period in 2015. Export of growing of non-perennial crops decreased by 20.4% in the same period. (CBS, 2016)

According to the Central Bureau of Statistics report, import of goods in Israel totaled NIS 23.8B. (CBS, 2016) In 2015 Israel imported $62.7B, making it the 46th largest importer in the world. During the last five years the imports of Israel have increased at an annualized rate of 6.8%, from $45.1B in 2009 to $62.7B in 2014. The most recent imports are led by Diamonds which represent 8.35% of the total imports of Israel, followed by Cars, which account for 6.46%. (OEC, 2015)

The top imports of Israel are, Diamonds ($5.24B), Cars ($4.05B), Crude Petroleum ($1.83B) and Integrated Circuits ($1.77B). Also, the top import origins of Israel are the United States ($7.22B), China ($5.91B), Switzerland ($4.76B), Germany ($4.57B) and Belgium-Luxembourg ($3.28B) (OEC, 2015)

Import of goods (excluding ship, aircraft, diamonds and fuels) increased by 11.2% at an annual rate in March-May 2016. Import of goods, in May 2016, totaled – as mentioned – NIS 23.8 billion. 42% of total imports were import of raw materials (excluding diamonds and fuels); 19% were consumer goods; 17% were machinery, equipment and land vehicles for investment; and 22% diamonds, fuels, ships and aircraft. (CBS, 2016)

Import of consumer goods increased by 15.0%, at an annual rate in March-May 2016, continuing an increase of 16.9% in December 2015-February 2016. Import of durable goods (furniture, electrical equipment and transport equipment) increased by 18.1%, at an annual rate, in March-May 2016. A breakdown by groups points that import of transport equipment increased by 36.2% in at an annual rate (2.5% monthly average). Import of non-durable goods (medicines, food and beverages, and clothing and footwear) increased by 9.2% at an annual rate, in the last three months.

Import of diamonds (net, rough and polished) in January-May 2016 totaled NIS 10.7 billion compared to NIS 11.2 billion in the same period of 2015. Import of fuels (crude oil, distillates and coal) in January -May 2016 totaled NIS 8.6 billion, a decrease of 37.4% compared to the same months of the previous year. (CBS, 2016)


The Israeli economy has undergone a substantial process of structural reforms, so that in relatively short time the Israeli economy has developed into a liberalized marketplace, trading in a wide range of manufactured goods and services worldwide. Intense entrepreneurial activity became the hallmark of the business environment, attracting the attention of foreign and local investors. The Israeli technological, research and knowledge-based industries have gained worldwide recognition and have served as an engine for economic growth. Overall, GDP per capita has grown substantially over the past few years. It has increased from the level of 17,475 (USD, PPP), to 27,382 (USD, PPP) in 2008, which is close to the OECD average. These figures represent the favorable Israel GDP condition, ranking Israel at par with other developed countries. (Nathanson, 2011)

2 Israels Real GDP

2.1 Data

Seasonally adjusted quarterly data (1995:1-2015:4) for Israel’s real GDP, based on 2010 constant prices, is taken from Central Bureau of Statistics of the State of Israel ( The quarter on quarter (QoQ) Growth Rate is added by Excel formula calculation.

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Table 1: Israel GDP data – Source: Israel’s central bureau of statistics.

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Figure 1: Israel’s Real GDP 1995-2015 – own illustration

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Figure 2: Israel’s Real GDP growth rate 1995-2015 – own illustration

2.2 Business Cycle

Now to determine the Business Cycle that the economy is currently situated, we must determine the output gap, as the business cycle is given by the deviation of the real GDP from the potential GDP.

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Market Study Israel. Forecasting Israel´s GDP Growth
Munich University of Applied Sciences
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Kristal Robles (Author), 2016, Market Study Israel. Forecasting Israel´s GDP Growth, Munich, GRIN Verlag,


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