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v  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.
v  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.
v  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 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 growth[1] (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. 
 
Table 1
Periods of growth and contraction in construction industry product, 1961-2015
(annual average, percent)
 
Average annual growth
Construction’s contribution to growthb
Construction’s share in GDPc
Period
Population
GDP
Construction industry product
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
2014–2015a
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.
 
 
An excerpt from the "Recent Economic Developments (140)": The construction industry and its contribution to growth

[1] Together with Poland.