Israel’s economy – seeking direction in summer 2012

Israel’s economy has been thrilled and excited on a decade of growth, which neither an Intifada, nor war with Lebanon nor global meltdown succeeded in halting. Last year, GDP shot forward 4.8%. And in 2012…….

Well, the prediction for 2012 has just been revised downwards, again, to 2.7%. While the hope for 2013 is to see a return to 3.5%, all these figures are looking  very optimistic. What’s going wrong?

The simple answer is bad trade figures. Exports have fallen off by 2.5% in the first quarter of this year, while imports have surged ahead. Specifically, exports to European mainland, notably in the pharmaceutical sector are way down. It is not the PIGS (Portugal et al) issue that has impacted on Israel so much – and yes, the pun was intended – but the slowdown of the other large economic powerhouses in the continent.

Decision makers at the Finance Ministry and the Bank of Israel are facing several problems at once.

ITEM 1: It is recognised that there is a major budget shortfall. Tax revenues are lower than expected. However, the defence establishment is demanding heavy and immediate new resources to cope with Iran, Syria and Gaza. The navy alone has asked for nearly a US$1 billion to protect Israel’s new offshore gas supplies. And other claims for expenditure are floating around as the government is being challenged to meet commitments over road building, new classrooms, pension schemes and more. If that is not complicated enough, the central bank is using the rate of interest to dampen the housing sector, which overheated.

There are some bright spots. By 2015, Israel should start to reap the benefit of new income from its offshore gas and oil fields. And internationally, as recorded by Deloitte, the country still inspires confidence in overseas investors.

However, it is ITEM 3, that is the real worry for me. Private sector consumption has remained positive, revealing a 2% growth in early 2012. That stat is often an indication that election economics is coming into play. This raises the ugly question as if the Finance Ministry will continue to manage its books for short term objectives or for the long term benefit of the country?

For the past decade, the latter has usually been the case, but just remember: Bibi Netanyahu, the Prime Minister has already delayed discussions on the 2013 budget due to internal political weaknesses. Markets will soon pick up on that uncertainty. Interest and exchange rates will feel the pressure and that in turn will force unwanted changes.

Israel has just gone through a two week heatwave. That is no excuse for a lack of leadership.

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Tags: economy, Israel, Recession

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