News / Economy

Once 'Best in the West,' Israel's Economy Shows Cracks

  • Palestinian women stand next to the remains of one of Gaza's tallest apartment towers, which was destroyed by an air strike, in Gaza City, Aug. 26, 2014.
  • Palestinians gather around the remains of an apartment building which was destroyed by an air strike in Gaza City, Aug. 26, 2014.
  • A Palestinian boy sits atop a car loaded with his family's belongings near their house, which was hit by an air strike, in Rafah in the southern Gaza Strip, Aug. 26, 2014.
  • Israeli emergency personnel surround a house that was struck by a rocket, fired from Gaza, in the southern coastal city of Ashkelon, Aug. 26, 2014.
  • Israeli onlookers stand at the scene after a rocket landed in the southern coastal city of Ashkelon, Aug. 26, 2014.
  • An Israeli surveys the damage to his apartment after a rocket struck a nearby house in the southern coastal city of Ashkelon, Aug. 26, 2014.
  • Palestinians carry the body of a Hamas militant, who was killed by an Israeli air strike, during his funeral in Gaza City, Aug. 26, 2014.
  • Smoke rises following air strikes in Gaza Aug. 26, 2014.
Crisis in Gaza – Tuesday, Aug. 26
Reuters

For more than a decade, Israel's high-tech-fueled economy has weathered the global financial crisis and several military conflicts with little impact on growth or the free flow of foreign investment.

But its strong run, which led former finance minister Yuval Steinitz to coin its justifiably upbeat tag as the 'Best in the West," may be coming to an abrupt end, with the era of sustainable high growth rates consigned to history.

The war against Hamas in Gaza, which ran into a 50th day on Tuesday, has taken a heavy toll, hitting tourism, slowing consumer spending as people stay indoors and denting manufacturing, especially in plants close to Gaza.

Even before the conflict began on July 8, growth was weakening. A preliminary estimate showed the economy grew an annualized 1.7 percent in the second quarter, down from 2.8 percent in the first, while unemployment inched above 6 percent from 5.7 percent in late 2013.

With a concerned central bank expecting the war to knock around half a percentage point off output, forecasts for growth of around 3 percent this year now look wildly optimistic, and the budget deficit is likely to exceed its 3 percent target.

After a decade of growth of 3-5 percent a year - during which Israel's economy has nearly tripled in nominal terms to $300 billion - some are even predicting a complete reversal.

“We might have a recession,” said veteran Israeli economist Ayelet Nir, although she adds it wouldn't be a deep one.

Prospects of a sharp downturn, coupled with near zero inflation, prompted a second surprise interest rate cut in the past month on Monday, when the Bank of Israel trimmed its benchmark rate to an all-time low of 0.25 percent.

“We are definitely in a slowdown in activity,” said central bank governor Karnit Flug.

Economists point out that the economy - 40 percent dependent on exports, mostly high-tech goods and software - is still looking solid compared with much of Europe and the West.

But like most developed economies, Israel is becoming more services-oriented, which means growth depends on its major trading partners buying its high-value services.

With the largest, Europe and the United States, both struggling and the shekel currency strong, Israel has to work even harder to be competitive and grow its exports.

Add to that war-weary consumers who are growing fed up with the high cost of living - even if inflation is stable - and the days of Israel posting up to 5 percent growth may be over.

“Our growth potential is not as high as before,” said Nir, who projects long-run output of around 3 percent.

“The population growth is not as high as in the past, investment is not as high as in the past, productivity is very low ... and Israel is transitioning from manufacturing to services,” she said. “It is happening very fast.”

Squeezed on all sides

Mai Doan, an emerging markets economist at Bank of America Merrill Lynch, said many of Israel's problems stem from the fact that the world has changed: Global trade has slowed, while fiscal restraint has weighed on growth, especially in Europe.

“Israel is a developed country so we are not talking high single digits [anymore]. So 2.5 or 3 percent is a decent rate of growth,” she said.

Once the Gaza conflict ends, the next problem Israel faces is the 2015 budget and the risk of missing fiscal targets. Finance Minister Yair Lapid has said the 3 percent deficit goal for 2014 will likely be breached.

A 2015 target of 2.5 percent of GDP is also in jeopardy due to a likely jump in the defense budget. At the same time, Lapid had promised not to raise taxes or limit social spending.

“There is some room for maneuver but not much,” Nir said. “It can be 3 to 3.5 percent but not 5-6 percent again.”

One perennial bright spot for Israel has been more than $10 billion a year in foreign direct investment as global companies such as Apple and Google snap up Israeli tech firms. In 2013, Israel was ranked fourth among the OECD - a club for rich countries - for foreign direct investment.

The country has also seen heavy investments in developing its natural gas sector, although investment in residential building and industries has declined over the past year.

Nir fears that the current round of fighting could dent inflows as companies take a wait-and-see approach.

Such flows have also been an Achilles heel for Israel's economy, prompting the shekel to appreciate sharply and making exports relatively more expensive. As a result, the Bank of Israel has bought more than $55 billion of foreign currency since 2008 in a bid to weaken the shekel.

It now stands at a nearly one-year low of 3.58 versus the dollar, after a 4.5 percent depreciation in the past month.

But in historical terms it remains strong. Only a month ago, it stood at a three-year high of 3.40, having appreciated 20 percent since 2009.

“What's hurting Israel now is the tradeable sector due to the strong shekel,” said Doan.

Analysts doubt the Bank of Israel will push its key rate to zero but if it does, the next step would be to buy bonds, following the pattern of 'quantitative easing' adopted in the United States.

“There is a good chance that Israeli rates will stay low even when the United States starts to raise them,” said Nir.

 

 

You May Like

Australia Knights Prince Philip, Sparking National Outrage

Abbott's surprise reintroduction of knights and dames in the country's honors system last year drew criticism that he was out of touch with national sentiment More

SAG Award Boosts 'Birdman' Oscar Hopes

Individual acting Oscars appear to be sewn up: SAG awards went to artists who won Golden Globes: Julianne Moore, Eddie Redmayne, Patricia Arquette, J.K. Simmons More

Katy Perry Lights Way for Super Bowl's Girl Power Moment

Pop star's selection to headline US football championship's halftime show extends NFL's trend of selecting artists who appeal to younger viewers More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Zoo Animals Show Their Artistic Sidesi
X
June Soh
January 23, 2015 10:03 PM
The pursuit of happiness is so important, America's founding fathers put it in the Declaration of Independence. Any zookeeper will tell you animals need enrichment, just like humans do. So painting, even music are part of the Smithsonian National Zoo's program to keep the animals happy. Faith Lapidus narrates a report from VOA’s June Soh.
Video

Video Zoo Animals Show Their Artistic Sides

The pursuit of happiness is so important, America's founding fathers put it in the Declaration of Independence. Any zookeeper will tell you animals need enrichment, just like humans do. So painting, even music are part of the Smithsonian National Zoo's program to keep the animals happy. Faith Lapidus narrates a report from VOA’s June Soh.
Video

Video Progress, Some Areas of Disagreement in Cuba Talks

U.S. and Cuban officials are reporting progress from initial talks in Havana on re-establishing diplomatic ties. U.S. Assistant Secretary of State (for Western Hemisphere Affairs) Roberta Jacobson said while there was agreement on a broad range of issues, there also are some “profound disagreements” between Washington and Havana. VOA State Department correspondent Pam Dockins has the story.
Video

Video Worldwide Photo Workshops Empower Youth

Last September, 20 young adults from South Sudan took part in a National Geographic Photo Camp. They are among hundreds of students from around the world who have learned how to use a camera to tell the stories of the people in their communities through the powerful medium of photography. Three camp participants talked about their experiences recently on a visit to Washington. VOA’s Julie Taboh reports.
Video

Video US, Japan Offer Lessons as Eurozone Launches Huge Stimulus

The Euro currency has fallen sharply after the European Central Bank announced a bigger-than-expected $67 billion-a-month quantitative easing program Thursday - commonly seen as a form of printing new money. Henry Ridgwell reports for VOA from London on whether the move might rescue the eurozone economy -- and what lessons have been learned from similar programs around the world.
Video

Video Nigerian Elections Pose Concern of Potential Conflict in 'Middle Belt'

Nigeria’s north-central state of Kaduna has long been the site of fighting between Muslims and Christians as well as between people of different ethnic groups. As the February elections approach, community and religious leaders are making plans they hope will keep the streets calm after results are announced. Chris Stein reports from the state capital, Kaduna.
Video

Video As Viewership Drops, Obama Puts His Message on YouTube

Ratings reports show President Obama’s State of the Union address this week drew the lowest number of viewers for this annual speech in 15 years. White House officials anticipated this, and the president has decided to take a non-traditional approach to getting his message out. VOA White House correspondent Luis Ramirez reports.
Video

Video S. Korean Businesses Want to End Trade Restrictions With North

Business leaders in South Korea are calling for President Park Geun-hye to ease trade restrictions with North Korea that were put in place in 2010 after the sinking of a South Korean warship.Pro-business groups argue that expanding trade and investment is not only good for business, it is also good for long-term regional peace and security. VOA’s Brian Padden reports.
Video

Video US Marching Bands Grow Into a Show of Their Own

The 2014 Super Bowl halftime show was the most-watched in history - attracting an estimated 115 million viewers. That event featured pop star Bruno Mars. But the halftime show tradition started with marching bands, which still dominate the entertainment at U.S. high school and college American football games. But as Enming Liu reports in this story narrated by Adrianna Zhang, marching bands have grown into a show of their own.

Circumventing Censorship

An Internet Primer for Healthy Web Habits

As surveillance and censoring technologies advance, so, too, do new tools for your computer or mobile device that help protect your privacy and break through Internet censorship.
More

All About America

AppleAndroid

World Currencies

EUR
USD
0.8930
JPY
USD
117.98
GBP
USD
0.6673
CAD
USD
1.2445
INR
USD
61.498

Rates may not be current.