Israel’s economy – another miracle in town?

The past decade has seen Israel fight an Intifada, launch wars to end infiltration from Gaza, defend itself from Hizbollah in Lebanon, and sink resources into defending itself from Iran. All this at a time when the global economy has journeyed along a veritable roller-coaster of retrenchment to success and back again.

And if you check out Israel’s economic growth over that period, you will see that it has been very positive. The graph shows consistent and continuous improvement. 5% per annum has been recorded several times. In other words, the Israeli economy seems to have found a formula, which allows for betterment despite geopolitical troubles, when the opposite has been true for many in history.

That said, predictions for 2012 were far less positive, coming in at 3% or less. The initial signs were not good, as exports to Europe began to dry up. Tax revenues fell to less than anticipated. Political change in Egypt and Syria put extra demands on the army.

And yet, has Israel done it again and discovered another miracle? The growth for the first six months of 2012 was 3.2%. And this is no consumer led boom. The governor of the Bank of Israel has been reported as saying that he is “more optimistic than I was six months ago”.

Our situation is similar to what it has been for the past year. Our situation is good, but not excellent. It’s a lot better than in most countries of the West.

So what’s the truth behind the numbers? Merrill Lynch gives an interesting assessment. The report notes that the government in Jerusalem is beginning to tackle the fiscal deficit, even if this carries a price of higher inflation and that in turn impacts more on poorer sections. Further, exports have held firm, although primarily due to a quirk in the figures of one large company.

However, the trends for the second half of 2012 are not encouraging.  On an annual basis, 3% is looking problematic.

Where to next? Europe should begin to pick up in 2013. Towards the end of the year, gas will start to be produced in commercial quantities. And if a general election is called for early 2013, there will be little opportunity “to buy voters”. This in turn will help to ensure that the level of government debt will not soar out of control.

So, Israel could still keep itself towards the head of the OECD pack in terms of economic achievements. Whether that can be interpreted as a miracle for such a small country to maintain, or whether it is a result of good planning or simply old fashioned luck, I will leave my readers to gauge for themselves.

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