karnit flug : the state of the israeli economy and challenges ahead main points of a speech by dr karnit flug, governor of the bank of israel, at the “ calcalist ” capital markets conference, tel aviv, 19 november 2013. * * * i will begin by presenting the state of the israeli economy and the challenges we face in the short term, and will then provide a brief discussion of the long - term challenges as well. the israeli market, as we know, is heavily influenced by the global environment. we are in an environment of global economic moderation, with a very moderate recovery in the advanced economies, and expectations are that this process will continue in the coming year. with that, the emerging economies are in a slowdown, and the expectation is that growth will continue to be relatively moderate for these countries. global trade, whose influence on the israeli economy is very large, is growing at a very moderate pace, and despite the fact that we expect its growth to accelerate in the coming year, it will still be relatively moderate. inflation in the vast majority of advanced economies is low, and with this background, we are witnessing extremely low interest rates and very intensive monetary accommodation in the major markets. growth in the israeli market is higher than in the other advanced economies over the past few years, including during the crisis, however it is closely correlated to them. the data published for the third quarter point to moderate growth of 2. 2 percent. this is a disappointing figure, and the main factor pulling growth downwards is exports, while consumption is what is currently pulling forward. on the assumption that world economic growth recovers as expected, we expect continued growth of 3. 4 percent in 2014, but it is important to mention that excluding the effects of natural gas production, lower growth is expected, and since natural gas production does not make a significant contribution in the short term to growth in employment, we expect growth in unemployment in the coming year. an overall view of the labor market shows that it is strong, as reflected in continued growth in the employment rate, and continued decline in the unemployment rate to such low levels that we have not seen in many years. this is the aggregate picture, and it is certainly a good picture. at the same time, if we look a little closer, we see a picture that is somewhat less rosy : an assessment of the composition of the labor market shows that growth in the number of employed persons is concentrated in the public services,

committee with the participation of the ministry of finance, the bank of israel, and the israel securities authority. such a committee will help to significantly reduce the probability of a threat to financial stability in israel ’ s economy in the future. dealing successfully with all these challenges requires the continued effective and productive cooperation that the bank of israel has with the relevant government ministries, particularly the ministry of finance. alongside setting monetary policy and providing economic advice to the government, the governor of the bank of israel is also charged with the responsibility of managing the bank. i am proud that the corporate governance regime at the bank of israel has undergone a real revolution in the past two years. policy decisions are not made by the governor alone, but within the framework of the monetary committee. the supervisory council oversees important administrative decisions. nonetheless, there are also internal challenges facing the bank of israel over the coming years. first and foremost, we will need to find a way to maintain the attractiveness of the bank of israel as a workplace which the very best will want to join. the bank ’ s main asset when it comes to serve the israeli economy is the human resource which lies within its employees. we must ensure that this resource does not erode. bank of israel employees come to work each day in order to serve the economy and the citizens – whether it is an employee in the currency department, which is charged with the regular supply of banknotes and coins to the economy, or the economist in the market operations department, which carries out, in actuality, monetary policy and is charged with managing the foreign exchange reserves which are the israeli economy ’ s insurance policy, or the staff of the banking supervision department, whose dedication and professionalism are the guarantee that israeli citizens ’ funds which are deposited with banks are in sure hands. we all take it as a given that the check that we deposit, or the funds transfer which we carry out, always reach their destination, but this would not happen if not for the control of the accounting, payment and settlement systems department at the bank, and there is no substitute for the analytical talents and policy recommendations of the research department economists, who work constantly to try to provide answers, to both the urgent policy questions and the longer term issues in the israeli economy. all these, with the help of the people in statistics, it, and various administrative units, are the human resource that the bis central bankers ’ speeches bank of israel places at the service of the israeli economy. i have no doubt that the