Australia / Israel Review

By Amotz Asa-El

It’s been a year now since major American mortgage banks went under, investment house Lehman Brothers went bankrupt, and insurance giant AIG went cap in hand to the politicians who then bailed it out.

One year on, experts are debating the extent to which subsequent stimulus packages, political transitions and market dynamics have borne fruit. While financier George Soros and economist Paul Krugman say the worst is behind America, investment guru Warren Buffet predicts inflation and Harvard economic historian Niall Ferguson warns that US President Barack Obama is chaining America’s future to debt.

In Israel, which to begin with arrived at the global recession well after its emergence, there is no reason to speculate – newly released data indicate that the recession here is over, thanks to a rare combination of responsibility, flexibility and some luck, too.

Considering that a recession’s definition is two (some say three) consecutive quarters of negative growth, the Israeli economy has turned the corner ahead of most other developed economies. During the second quarter of 2009 GDP rose 1%, following a 3.7 % contraction during the previous quarter. Unless a new turn for the worse appears in the upcoming months, Israel’s recession will have lasted a mere 10 months.

Across the country, the sense of renewed confidence is palpable. Shopping malls, theatres, restaurants and resorts are crowded with vacationers, as is Ben Gurion Airport, where thousands depart every hour to vacations in Europe, and often also beyond. This explains the Central Bureau of Statistics’ report that second quarter local business product inched up 0.7% after declining 4.8% during the year’s first three months, while per-capita private-consumption spending climbed 2.7% after dropping 5.6% during the previous quarter. Perhaps most tellingly, purchases of durable goods soared 19% after plunging 40% the previous quarter.

Of course, with all due respect to Finance Minister Yuval Steinitz’s declaration “Israel’s recession is over,” the situation remains precarious. While the number of jobseekers declined 2% in July to 225,000, unemployment has leaped within less than two years from 5.9 to 8.4%. True, the number of newly unemployed people has declined handsomely since the first quarter’s 75,000, but the following quarter’s 60,000 is far from an ideal statistic. And yet, economists agree that the Israeli economy has suffered much less than others during this crisis, and is clearly well on its way out of it while others lag behind. Why?

Israel has avoided much of the past year’s global hangover because it did not take part in the financial boozing that preceded it.

Having endured a self-inflicted economic plague back in the 1980s and recalling vividly the bitter potions that eventually cured it, Israelis would now neither peddle nor buy anything like subprime mortgages or the other toxic assets that were at the heart of the past year’s financial drama. This hard-won mentality of caution is why no Israeli financial institution collapsed in the wake of the global crisis.

Similarly, a strict budget deficit cap made it legally impossible for the government to overspend the way many European governments, from Hungary to Latvia, had done before sinking into crises that have become a major headache for the European Union. At the same time, while America’s defence spending rose sharply following 9/11, Israel’s 20% cut in defence spending back in the 1980s, the deepest any Western army endured in recent decades, meant that the budget’s hungriest client could only demand so much. That is why even the operations in Lebanon and Gaza in ’06 and ’09 hardly impacted the macro-economy.

Another reason for this endurance is that the global mayhem never posed a long-term threat to the Israeli economy’s most vital parts, the technology, biomed and defence industries. There is no equivalent right now in Israel for an ailing behemoth like General Motors, a symbol of lost glory whose future, if it has one, is in the hands of the government. In Israel this kind of bleeding dinosaur was last seen a generation ago, when the country’s then-largest holding company, Koor, was sold to private buyers who then closed, trimmed or spun off its assorted holdings, before returning its debts and redefining its focus.

Now Israel’s large-scale exporters, though having felt the global storm, seem to have weathered it.

For instance, Israel Aerospace Industries, the largest employer in the Defence industry, saw first half sales decline from US$1.9 billion to US$1.44 billion, but remained firmly profitable, as its net income during that period, while dropping 40%, remained a solid US$50 million. Others faired even better. Pharmaceutical giant Teva saw second quarter sales soar 20% to US$3.4 billion and its net rise 25% to US$742 million, while software-security developer Checkpoint’s second quarter sales climbed 12% to US$223 million and its net income totaled US$75 million, a mere 4% less than the same period the previous year.

Still, with the Israeli economy relying heavily on exports, pressure was felt by thousands of companies which found overseas demand weakened, and the shekel excessively strong. Eager to ease the pressure on exporters, Bank of Israel Governor Stanley Fischer announced last year that the Bank of Israel would start buying US$100 million daily, hoping that the consequently increased supply would depreciate the local currency.

In general, this policy worked, leading the US dollar back from a low value of nearly 3.2 shekels back to 4 shekels to the dollar. By mid-2009, however, the policy had exhausted itself, as the shekel began to appreciate again and the central bank said it would stop the daily dollar purchases. Still, by then growth had been restored, and in fact the Consumer Price Index jumped 1.1% in July alone, the largest and fifth-consecutive monthly rise in prices after four deflationary months. Taking into consideration the government’s decision to expand the budget deficit, the Bank of Israel announced an interest rate rise in late August from the historic low of 0.5% to 0.75%, the first rate rise in Israel since August 2008, and in fact the first anywhere in the developed world since the beginning of the global crisis.

Even so, it is clear that while elsewhere the global meltdown exposed structural weakness and political perplexity – in Israel it unveiled structural durability and political agility.

On top of that, while fighting recession, the Israeli economy unwittingly shed its most famous drawback – a complete lack of natural resources. The finding of large-scale natural gas fields off of Israel’s Mediterranean coast, which happened by sheer coincidence at the height of the crisis, has added to Israel’s economic self-confidence just when that feeling was needed most. Such was also the activation of the second of five desalination plants along the coastline, which are expected to supply within five years 80% of Israel’s drinking water, thus rendering obsolete the ancient axiom that Israel lacks water.

While the Israeli economy is braving the tempest surrounding it, risks still abound.

Prime Minister Binyamin Netanyahu’s strategic choice to navigate through this turbulence with the unions aboard his ship has so far generated the industrial quiet he sought, but also resulted in a 20% increase in government spending during the second quarter. This was enabled by Netanyahu’s abandonment of the 1.7% budget deficit cap which he had instituted as treasurer back in 2003, and which has now been raised to 6%. At the same time, Netanyahu raised car-purchase taxes and the value-added tax along with various other taxes, despite a campaign promise to lower taxes. Had he not struck his strategic deal with Labor, Netanyahu could have cut the budget and avoided his spending increases.

While in line with budgetary trends elsewhere in the developed world, the jury is out as for the long-term implications of this fiscal generosity. For his part, Netanyahu says that the global crisis and the budgetary expansion that has come in its wake offer not only risks but also opportunities.

Netanyahu and Steinitz see these opportunities primarily in two realms: land and railways. In August they passed a reform which they promise will simplify and shorten the procedures involved in purchasing and developing real estate, and shortly before that they unveiled a 50 billion shekel (A$15.9 billion) plan to dramatically expand and upgrade Israel’s railway system.

The jewel in the railway plan is a planned line that will connect Israel’s southernmost point, the Red Sea resort town of Eilat, with the northern city of Haifa.

Crossing the Negev Desert before joining the existing system, the 200 km line will hopefully spur growth not only by better connecting the socially disadvantaged south with the rich coastal plane, but also by connecting Israel’s Red Sea and Mediterranean seaports. Such a transshipment artery will not achieve its full potential as long as global commerce has not been rehabilitated. That, in turn, will only happen once the global recession – like Israel’s – is declared over.