Posted tagged ‘Recession’

Israel’s economy October 2012: Blowing against the winds of gloom

October 9, 2012

The IMF has just released another report on the world’s finances, which should be avoided by those who hate reading bad news. “The global economy risks skidding toward recession just three years after pulling out of the previous one.”

Politicians like Obama may look for some positives ahead of the referendum on his first four years. Merkel is visiting Greece this week for the first time, trying to find a smile for the cameras. Cameron is desperate for glimpse of a positive stat, as he speaks to his party faithful this week in Birmingham. Even China’s leaders have shortened their gulps of self-praise. The bottom line is there ain’t too much genuine and lasting solid economic news to go round.

One small exception to this pattern is the IMF’s review of Israel. For example, growth in 2013 (3.6%) may well be better than for this year (3.3%) in the Holy Land, where as the global trend is in the opposite direction. Israel’s debt-to-GDP ratio, so dangerously high in Greece and Spain. is predicted to fall to 67% by 2015. In America, that figure is nearer to 120%.

A report posted on NASDAQ’s website pointed out the obvious. The IMF does not consider potential political changes – potential wars in the Middle East, general elections or other minor disturbances. However, the comment is overwhelmingly positive. “Some investors may want to consider a closer look at the Israeli economy despite the headwinds that are currently facing the nation.”

I have written recently that Israel’s financial decision makers have some difficult weeks coming up – uncertainties over the next budget, rising commodity prices, and falling tax revenues in the short term. And as the IMF has made clear, export markets are very soft for the immediate future.

What appears to be favouring Israel at this time is a relatively stable economic and commercial structure, which will soon be supported by revenues from new energy sources. It will be the task of the mandarins in Jerusalem and at the Bank of Israel to protect these achievements, whatever changes are in the air.

Industry, recession and the failure of central planning

August 13, 2012

It is not a rocket science. You do not need a degree in finance or business admin. During an economic downturn, factories close. People are laid off.

Not only is unfair to the workers – and their families. Quite often local communities suffer the knock on effects. In turn, social services are inadequate to meet the challenges. Meanwhile, the government is…………………well, let’s come back to that.

For the moment, let us examine what is happening to Israel, as European markets dry up and domestic industries are cutting stocks. A vegetable canning factory near Safed has yet again had to appeal for help from the authorities. Phoenicia Glass, employing hundreds across ethnic lines, is short of nearly US$100 million.  Extra Plastic, Sederot, with over 120 workers and located in town that had the dubious pleasure of suffering consistent shelling from Gaza for years, is about to go under – even though the owners recently paid out a hefty dividend recently.

Blame poor management, unexpected changes in the markets, owners cleverly manipulating some accounting rules, etc – factories are shutting their doors. Meanwhile, the government is…………..

Would it be too cynical to state that the government is too worried about votes? After all, a general election is scheduled within the next 12 months. What bothers me is the lack of planning, when handling these situations. These crises can be predicted to a certain degree. So for example, surely if a factory cries for help, statutory payments can automatically be delayed for 60 days – maybe paid off later or just cancelled?

And where are the benefits to the workers? Offer them a small sum each and some space to start up a small business. Provide them some mentoring hours for free. Those are just three obvious suggestions that would cost the central treasury relatively nothing compared to unemployment pay, lower tax revenues from the community and the cost of other social problems.

Unfortunately, what the Israeli public is left with is sensational headlines and a dawdling cumbersome government mechanism that may or may not cobble together solutions and wrapped in wafer-thin spin. Meanwhile, the economy continues to suffer, along with hundreds of families.

If only Netanyahu had stayed as Israel’s Finance Minister?

July 24, 2012

Whatever you say about the man, when Israel’s current Prime Minister, Benjamin (Bibi) Netanyahu was Finance Minister, he did a great job. The stats show that from 2003, he initiated and then presided over a period of supreme growth in Israel’s economy, a pattern that continues today nearly a decade later.

However, that triumph is increasingly looking like a thing of the past. GDP, export and tax revenue forecasts for 2012 are being consistantly revised in the wrong direction. And Bibi, as Prime Minister, is spending his time these days shoring up his coalition, investing in incentives for new partners rather than in industry. Some basic facts from this week’s news alone:

  • The stock market is dropping, just like much of the OECD economies.
  • Tax revenues are over half a billion dollars below expectations
  • Unemployment, expected to rise after its record low last year, is still higher than predicted
  • As European economies freeze up, exports have not found enough new markets, leaving a widening gap in the balance of trade.

In contrast, one of the deals Bibi offered to a group of politicans was estimated to cost around 12 million shekels (US$3 million). So when it was announced this week that the Ministry of Finance has delayed the decision making process for the 2013 budget, you have to ask yourself: “What’s going on? Is anyone in charge?”

As I indicated, Prime Minister Bibi has spent much of the last 2-3 months manipulating small partners and potential partners for his coalition. Commentators and opinion polls inidicate that he has lost political capital in the process. By way of a suggestion, if he cannot lead the squabbling pack, maybe he should stick to what he knows best, economics…….before his legacy is lost and the country has to face a needless time retrenching.

Israel’s economy – seeking direction in summer 2012

July 20, 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.

Can Israel’s economy weather the Euro crisis?

June 3, 2012

Proctor & Gamble believe that Israel is a premier “start up nation”. After all, “Israel is the biggest destination for global venture capital per capita“. In parallel, the recent discovery of commercial gas reserves means that :

Israel could meet its own electricity needs in the future and possibly become a net exporter to a gas-thirsty region. This would bring economic and political benefits as well as regional clout at a time when Israel’s regional standing is more uncertain than it has been for decades.

Israel’s economy is due to grow at around 3% in 2012. Unemployment is still falling, for now. Tourism figures continue to soar. All is rosy. And yet…..

The mandarins in the Bank of Israel and the Finance Ministry, who sit less than half a mile away from each other in Jerusalem, have known for over a year that they cannot ignore the fallout from Greece, Spain et al. While Israel’s banking exposure to these countries has always been minimal, around a third of the country’s trade involves the Euro zone and the UK.

For some analysts the credit crunch has already arrived. Yes, the Bank of Israel is demanding higher capital adequacy ratios. some of my clients are finding bank managers less receptive than in the past.

And today’s newspapers are full of rumours of higher VAT and corporation tax to be imposed as early as mid 2012. This will be combined with cuts in budgets of the public sector.

On the one hand this is not an encouraging scenario. However, there are two takeaways that should give the local decision makers a lot of hope.

First, if Europe does try to infect her neighbours with its cold, then Israel can face the attack from a position of strength. Second, by taking preparatory measures now to ensure that the Euro problem can we weathered, Israel will be able to use its new raw materials to generate greater economic wealth in the future.

Salt and Father Christmas: A case study to beat the impending economic downturn

January 2, 2012

Richard Salt has just finished a 5-year stint as Director of UK Trade and Investment at Britain’s embassy in Tel-Aviv.

Richard is not just your ideal friendly economic diplomatic. As his ambassador described, he has been the perfect Father Christmas at staff parties in recent years. This is a person, who quietly but forcibly has driven trade between the two countries to consistanly higher levels, despite three years of international economic gloom.

First some facts. Combined trade between Britain and Israel has now beaten the £3 billion mark, roughly a third higher than when Richard arrived in the Holy Land. In 2010 alone, 14 additional Israeli companies set up shop in Britain. Sir Richard Branson visited Israel just before this Christmas break, when he announced Cleantech partnerships with local companies. And a new UK-Israel scientific body was launched last month, securing the UK a smoother path to collaborate with the successes of Israeli hightech.

Walk into the embassy in Tel Aviv and you are greeted by an experienced and professional economics team. They know the potential of both countries superbly well. If the Israeli side presents a clear vision of what kind of British partner they are looking for, the chances of success are high.

The economic outlook for 2012 in Europoe is not one of cheer nor optimism. A recent opinion pieceby Prof. Zilberfarb in Globes, one of Israel’s leading financial journals, detailed how:

What is the link between the global shocks and developments in Israel? The answer is simple. More than 40% of Israel’s output is exported. A crisis in global markets, which reduces their demand, therefore affects almost half of Israel’s output. Given this figure, Israel’s rapid growth, despite the global recession (from late 2008), is extremely impressive.

2012 is shaping up to be a year in which the Israeli economy will show signs of surrendering to the global crisis. There will not be a recession, but a sharp slowing of the growth rate from about 5% to 3%.

In that perspective, the achievements of Salt’s team were not just impressive. Their approach shows a way forward for others to follow.

Israel and the OECD: Good, bad, and the ugly

November 29, 2011

It is just over a year since Israel became the 33rd member of the OECD.

Some of the comparative stats look very impressive. The country may spend less on health than others, but Israel is fifth on the ladder of life expectancy.  As for the price of food, Israelis pay less than citizens in other countries, even if this will come as a surprise to many householders in the Holy Land.

This week, the OECD published its latest report on the Israeli economy. Unemployment should hold steady along with price inflation. There should still be some real growth per capita. That said, GDP increase for 2012 is forecast at 2.9%, barely 60% of the prediction for this year.

The problem is the ugly unknown threat of the European downturn. Nobody can say for sure just how deep it will be.

The Bank of Israel has already chirped in and cut the rate of interest by 0.25% to 2.75%. While stressing the Euro factor, the bank commented that:

Economic indicators that became available this month support the assessment that in the third quarter and in October the slowdown in the rate of growth of economic activity continued. Most of the slowdown in the domestic economy resulted from the easing in global demand and its effect on exports, and also to some extent from the slackening of domestic demand.

As I commented yesterday, the Israeli economy is still reacting from a position of strength. That said, changes will need to be made and soon in order to maintain the country’s competitiveness in key sectors. One simple example is the central control of the agricultural sector, which keeps the price of local produce artificially high. Another problem is the bureaucracy surrounding small companies wishing to receive support. The tax system is crying out for simpification. 

The OECD report stated that Israel is “expected to avoid recession” in 2012. That is a warming remark as we head into winter, but policy makers cannot afford to be complacent. It is time for new structural changes in order to protect the impressive economic achievements of the past.