What next for Israel’s economy?

The Israeli stock market kicked off the week with a near 4% jump. This brought it back up to the levels of November 2008.

In parallel, unemployment has hit 8.5% and inflationary fears are on the move. What’s going on?

Listening on the radio yesterday, one of the country’s leading constructors, Akirov, referred to the state of two economies. And Israel is well used to this situation. Despite the growth in GDP over decades, Israel has one of the widest discrepancies amongst Western economies between the top and bottom income earners .

Specifically, Israel’s economic policy makers are faced with several contradictions over the next few months.

For example,the rate of interest stands at 0.5%, down from 4% in August 2008. Alhough the Bank of Israel has announced “no change” for August, everybody knows it will start to rise in order to head off inflation.

However, such a movement will protect the shekel, already seen as overvalued against key currencies like the US dollar.

Now look at the stock market: It has been driven upwards by the performances of Wall Street, low interest and future expectations. However, for the small private investor to start risking money on the back of current improvements is… it’s still a risk. The world may be over the worst of a recession, but the downturn still remains in may key economies.

As for the government, there are signs that a budget will be passed soon. However, the pressures of coalition politics place an enormous strain on the spending side. And politically, Mr Netanyahu has not shown a clear capability to lead and to control.

The governemnt has promised huge structural reforms – opening the supply of electricity to competition, privatising the ports, etc. In opposition, the unions have already demonstrated their strengths.

So what’s the bottom line? It is great to read about the stock market leaping forward. However, economic history teaches us that sustained economic growth, the basis of any solid financial revival, rarely comes through one-off, huge improvements.

The government needs to lead through constructive initiatives and sound decision making. Now that would be a revelation in the Holy Land.

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One Comment on “What next for Israel’s economy?”

  1. Michael Horesh Says:

    To confirm the uncertainty, see “Economic indicators pointing this way and that ” at http://www.haaretz.com/hasen/spages/1103146.html


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