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

    Vietnam Mulls Tough Measures for ‘Misbehaving’ Chinese Tourists

    Move comes after footage surfaced online of Chinese travelers harassing a banana hawker in Da Nang

    Pakistan Social Media Star's Honor Killing Fuels Debate

    Qandeel Baloch's murder puts spotlight on deadly tradition and other mistreatment of women

    Featured Videos

    Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
    Wall Already Runs Along Parts of US-Mexico Borderi
    X
    July 22, 2016 12:30 AM
    The Republican Party’s presidential nominee, Donald Trump, gained the support of many voters by saying he would build a wall to keep undocumented immigrants and drugs from coming across the border from Mexico. Critics have called his idea impractical and offensive to Mexico, while supporters say such a bold approach is needed to control the border. VOA’s Greg Flakus has more from the border town of Nogales, Arizona.
    Video

    Video Wall Already Runs Along Parts of US-Mexico Border

    The Republican Party’s presidential nominee, Donald Trump, gained the support of many voters by saying he would build a wall to keep undocumented immigrants and drugs from coming across the border from Mexico. Critics have called his idea impractical and offensive to Mexico, while supporters say such a bold approach is needed to control the border. VOA’s Greg Flakus has more from the border town of Nogales, Arizona.
    Video

    Video New HIV Tests Emphasize Rapid Results

    As the global fight against AIDS intensifies, activists have placed increasing importance on getting people to know their HIV status. Some companies are developing new HIV testing methods designed to be quick, easy and accurate. Thuso Khumalo looks at the latest methods, presented at the International AIDS conference in Durban, South Africa.
    Video

    Video African Youth with HIV Urge More Support

    HIV, the virus that causes AIDS, is the top killer of teens in sub-Saharan Africa. But many youths say their experience with the virus is unique and needs to be addressed differently than the adult epidemic. VOA South African Correspondent Anita Powell reports.
    Video

    Video Poor Residents in Cleveland Not Feeling High Hopes of Republican Convention

    With the Republican Party's National Convention underway in Cleveland, Ohio, delegates and visitors are gathered in the host city's downtown - waiting to hear from the party's presidential candidate, Donald Trump. But a few kilometers from the convention's venue, Cleveland's poorest residents are not convinced Trump or his policies will make a difference in their lives. VOA's Ramon Taylor spoke with some of these residents as well as some of the Republican delegates and filed this report.
    Video

    Video Pop-Up Art Comes to Your Living Room, Backyard and Elsewhere

    Around the world, independent artists and musicians wrestle with a common problem: where to exhibit or perform? Traditional spaces such as museums and galleries are reserved for bigger names, and renting a space is not feasible for many. Enter ArtsUp, which connects artists with venue owners. Whether it’s a living room, restaurant, office or even a boat, pop-up events are bringing music and art to unexpected places. Tina Trinh has more.
    Video

    Video With Yosemite as Backdrop, Obama Praises National Parks

    Last month, President Barack Obama and his family visited some of the most beautiful national parks in the U.S. Using the majestic backdrop of a towering waterfall in California's Yosemite National Park, Obama praised the national park system which celebrates its 100th anniversary this year. He talked about the importance of America’s “national treasures” and the need to protect them from climate change and other threats. VOA’s Julie Taboh reports.
    Video

    Video Counter-Islamic State Coalition Plots Next Steps

    As momentum shifts against Islamic State in Iraq, discussions are taking place about the next steps for driving the terrorist group from its final strongholds. Secretary of State John Kerry is hosting a counter-IS meeting at the State Department, a day after defense ministers from more than 30 countries reviewed and agreed upon a course of action. VOA Pentagon correspondent Carla Babb reports.
    Video

    Video Russia's Participation at Brazil Olympic Games Still In Question

    The International Olympic Committee has delayed a decision on whether to ban all Russian teams from competing in next month's Olympic Games in Brazil over allegations of an elaborate doping scheme. The World Anti-Doping Agency recently released an independent report alleging widespread doping by Russian athletes at the 2014 Winter Olympics in Sochi. So far, only Russian track and field athletes have been barred from the Summer Games in Brazil. VOA's Zlatica Hoke has more.
    Video

    Video Scotland’s Booming Whisky Industry Fears Brexit Hangover

    After Britain’s vote to leave the European Union, Scotland’s government wants to break away from the United Kingdom – fearing the nation’s exports are at risk. Among the biggest of these is whisky. Henry Ridgwell reports on a time of turmoil for those involved in the ancient art of distilling Scotland’s most famous product.
    Video

    Video Millennials Could Determine Who Wins Race to White House

    With only four months to go until Americans elect a new president, one group of voters is getting a lot more attention these days: those ages 18 to 35, a generation known as millennials. It’s a demographic that some analysts say could have the power to decide the 2016 election. But a lot depends on whether they actually turn out to vote. VOA’s Alexa Lamanna reports.
    Video

    Video Number of Syrian Refugees Arriving in US Jumps

    The United States is committed to resettling 85,000 refugees from around the world by October. Of that number, 10,000 will come from Syria and already some 4,000 Syrian refugees have arrived in the United States, many of them settling in the state of Illinois. As VOA’s Kane Farabaugh reports from Chicago, their arrival is not the end of a difficult journey to find peace and stability.
    Video

    Video Rio’s Trams Await Olympic Tourists

    Over the past century, many cities around the world replaced electric trams, prone to breakdowns and backups, with faster and more spacious buses. But for some reason restored antique trams are a huge tourist attraction. So it’s no wonder the authorities in Rio de Janeiro are busy restoring their city’s old tram line ahead of the Summer Olympic Games. VOA’ George Putic reports.

    Special Report

    Adrift The Invisible African Diaspora

    World Currencies

    EUR
    USD
    0.9079
    JPY
    USD
    106.10
    GBP
    USD
    0.7636
    CAD
    USD
    1.3106
    INR
    USD
    67.076

    Rates may not be current.