BANK OF ISRAEL
Office of the Spokesperson and Economic Information
December 29, 2015
Press release
An excerpt from the upcoming "Recent Economic Developments (140)" that will soon be
published:
The construction industry and its contribution to growth
 In recent years, an expansion in construction industry activity in Israel has been seen.
This expansion differs from preceding ones. While previous periods of strong growth
occurred during accelerating growth in population and GDP, the current expansion is
related to, among other things, the global economic crisis and the countercyclical
actions taken in order to protect the economy from it.
 The increase in construction industry activity is reflected in its increased share in
GDP, rising from 4.4 percent in 2007 to 5.7 percent in 2013. During that time,
construction industry product increased by a faster rate than GDP did, and its average
contribution to annual growth was 0.3 percentage points.
 The upswing in the construction industry that occurred against the background of the
global economic crisis is an exception among OECD countries; in fact, in some of
them the slowdown in the industry even led to the outbreak of the crisis. This
upswing was made possible by the Israeli economy’s resilience upon entering the
crisis, and contributed to GDP growing, in contrast to the trough in the global
business cycle and the slowdown in exports.
In recent years, an expansion in construction industry activity has been seen in Israel. An
analysis conducted at the Bank of Israel, which is to be published in Recent Economic
Developments for the second half of 2015, examines the industry’s contribution to
Israel’s economic growth both relative to previous growth cycles and relative to the
development in the world in that time. Construction industry product increased between
2007 and 2013 by 7.9 percent, a more rapid rate than that of GDP, which grew by 3.5
percent. Its share in GDP increased from 4.4 percent in 2007 to 5.7 percent in 2013. The
average contribution of the construction industry to annual GDP growth reached about
0.3 percentage points during those years. During this period, about 54,000 workers were
added to the industry and the share of construction in employment increased from 6.1
percent to 6.7 percent. However, it had a smaller effect on employment of Israelis—only
Bank of Israel - The construction industry and its contribution to growth (Dec. 2015)
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about one-half of the new workers were Israelis, and its share in employment of Israelis
remained virtually unchanged at around 5 percent.
The policy response in Israel and worldwide to the economic crisis of 2008 contributed to
the expansion noted above. The crisis brought with it reductions in interest rates around
the world and domestically, which were reflected in reduced yields for all terms. These,
in turn, contributed in Israel to an increase in demand for homes, which came after a
prolonged period of slowdown in construction. As a response, investment in residential
construction increased, together with a complementary increase in other types of
construction. Thus, there was countercyclical enhanced activity in the construction
industry, which helped to moderate the negative effect of the global crisis on Israel’s
economy.
A long term view shows that the direct contribution of construction product to growth has
declined over the years. Nonetheless, this was not a continuous contraction, as
construction industry product is cyclical: at times it expands sharply and at times is
contracts moderately (Table 1). The current upswing of activity in the industry is not out
of line, in its relative strength, to previous periods of strong activity, such as those seen in
the 1960s and 1990s. However, it does differ in that the others were prompted by a rapid
increase in population, and they came together with strong activity throughout the
economy.
Figure 1 indicates that the sharp increase in domestic construction product occurred in
parallel with contraction in construction activity in most OECD countries. When
countries are ranked by the cumulative output gap in 2004–09, it is found that the
countries adversely impacted the most severely by the global crisis also suffered a sharp
decline in the construction industry. This was also reflected in a steep drop in
construction’s share in GDP—that is, the decline in construction industry product in those
countries was well beyond the decline in the overall economy. Israel, in contrast, was
negatively impacted the least since the global crisis and also derived the largest average
contribution by the construction industry to annual growth1 (about 0.3 percentage points).
These phenomena are interconnected: Israel’s economic resilience allowed it to increase
investment in the construction industry, in contrast to countries that were negatively
impacted by the financial crisis and experienced a credit shortage. Yet at the same time,
the actual increase in construction industry product itself helped the economy preserve in
its growth despite the trough in the global business cycle and the slowdown in exports.
1
Together with Poland.
Bank of Israel - The construction industry and its contribution to growth (Dec. 2015)
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Table 1
Periods of growth and contraction in construction industry product, 1961-2015
(annual average, percent)
Average annual growth
Construction's
Construction
contribution Construction's
Period
Population GDP industry product
to growthb
share in GDPc
1961–1972
3.4
9.4
9.2
1.0
10.8
1973–1986
2.1
3.5
-2.0
-0.2
5.0
1987–1996
2.9
5.4
10.0
0.5
7.7
1997–2007
2.1
4.0
-1.1
-0.1
4.4
2008–2013
2.0
3.5
7.9
0.3
5.7
a
2014–2015
1.7
2.3
-2.2
-0.1
5.3
a
Data for the most recent period are based on quarterly data and include partial data for 2015.
b
The contribution to growth is equal to the growth rate of construction industry product
multiplied by its share at the end of the previous period.
c
At the end of the period.
SOURCE: Based on Central Bureau of Statistics.
8.0
Figure 1
Share of construction in GDP, Israel and other OECD countries, by severity of
negative impact from the crisisa, 1995–2013
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
Israel
Moderate
Medium
Severe
a
The figure compares construction’s share of GDP in Israel and the average share in countries that were impacted
by the crisis (1) severely, (2) to a medium extent, and (3) moderately. The countries were divided into groups by
cumulative output gap in each country.
SOURCE: Based on OECD.
Bank of Israel - The construction industry and its contribution to growth (Dec. 2015)
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