Israel’s economy – going well, but for who?

In the past year, Israel’s economy has managed to defy both the global economic crisis and the worsening security situation, posting an annualized 4.4 percent growth in the last quarter…

Impressive. Now here’s, something even more amazing. That quote comes from Newsweek, almost exactly one year ago, in early March 2010. As for the economy at the end of 2010 itself, note the similarity in the description.

Israel’s GDP rose at an unprecedented pace of 7.8%,on an annualized, seasonally adjusted basis, in the fourth quarter of 2010, the Central Bureau of Statistics reported today. GDP rose by an annualized 5.4% in the second half of last year, after rising 5% in the first half, and 3.4% in the second half of 2009.

Direct investments continue. Kaltura, a developer of open source online video platform, has just secured US$20 million. The government is ploughing around US$100 million into incubator companies. Everything is coming up roses …but there again, maybe not quite.

At the beginning of the week, Bibi Netanyahu, the Prime Minister, was forced to make a series of tax concessions. Petrol, water, transportation will all come down in price. So far, the budget framework, which was passed only recently, has not been too disjointed. But it is clear that the government will have to make cut backs in order to finance the tax changes.

However, it is a mute point if the threat of strike in the public sector will force more concessions from the politicians over the coming month. Talks with the Histadrut, the trades unions, are not progressing smoothly.

And this pressure group has a point. The price rises hit the lower and middle classes. Tax  comparisons continue to show how the latter in particular are being squeezed on all sides.

And that is not all. Let’s start with something simple like inflation. The official stats point to price stability, well within the limit set by the Treasury of under 3%. However, given the rise of oil prices, commodity prices in general and poor crop growing weather, prices are on the move upwards.

These factors will only encourage the wonderfully cautious Stanley Fischer,  governor of the Bank of Israel, to raise interest rates. Correct he may be, but this will impact negatively on future economic growth. More squeezing of the weaker sectors.

Where next? Growth will probably continue, but not necessarily at the same pace. Will the politicians care? The fear is that they will bury their heads and gloat about wonderful economic stats.

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