What makes Israel recession-proof?

The country’s GDP growth remains strong, despite the global crisis. But after a £1.9bn bank bail-out, and with talk of recession rife, the question is: can the growth continue? Yes, the experts tell us.

By Candice Krieger and Simon Griver, December 4, 2008

A drop in production is inevitable
Mark Ross, chief executive of the British-Israel Chamber of Commerce

Israel is not in recession as it has not experienced two consecutive quarters of negative growth. GDP growth currently stands at 2.3 per cent.

However, if it drops below 1.7 per cent, it falls below the rate of population increase, and if it stays like that for more than six months, Israel will be in recession.

Israel’s GDP is expected to hover around 2 per cent in 2009, but any shifts in the global economy could cause a drop. Although Israel did not invest significantly in subprime, it will be affected. A drop in production and employment is inevitable for an economy dependent on foreign trade.

Israel’s exposure to the effects of the US housing market crisis is limited compared to that of the UK. However, as Israel relies so heavily on trade and investment from those countries who are suffering directly, it should not surprise us when the Bank of Israel takes drastic action or when unemployment increases. The bank has been quick to react to shifts in the economy.

Now is the time to increase spending, which can increase economic demand, employment and GDP. Israel is also building up a reserve of more than $40bn in foreign currency, which will be very useful if Israel gets any closer to recession.

Hurt, but not as badly
Professor Leo Leiderman – chief economist at Bank Hapoalim

It looked as if Israel was decoupling from this whole crisis, but the past three months have been awful for every market.

We now feel that the crisis is about to hit. In terms of economic conditions, Israel is better-placed than the UK to face it. The foundations of the economy are relatively strong. But, of course, the strength of the negative shock is so big that no matter how well an economy is performing, everyone is hit. If there is a lot of rain, it doesn’t matter how big your umbrella is, you will still get wet.

There is going to be some painful adjustment in Israel — and it is not something that policy-makers can fix overnight.

There has been an impact on exports and venture capital, and a drop in domestic consumption. People are not used to seeing the value of their savings drop as they are now.

Our stock market has gone down about 40 per cent since the beginning of the year, so the portion of portfolios that has been invested in the stock market has been coming down. We are also seeing a fall in consumer confidence.

Whatever ever happens to Europe and the US will happen to us, but in a much weaker way.

We have injected billions
Dr Eldad Shidlovsky, head of the Economics & Research Department of the Ministry of Finance.

We do not expect a recession in Israel. We will finish 2008 with growth of 4.2% and expect growth of between 1.5% and 2.7% in 2009. We do not have the conditions in Israel that exist abroad, such as problems with the financial system.

However, we are being significantly influenced by the global situation. Exports will fall, there will be uncertainty, and this will result in an increase in unemployment and a decrease in private consumption.

We have presented a stimulus package which, subject to government approval, involves an investment of NIS 21.7 billion.

This includes measures to encourage employment and business; an increase in infrastructure projects such as roads, railways and the construction of schools; the promotion of industrial R&D; and provision of credit and guarantees to the banks and capital market.

We will continue with our programme to cut income tax and company taxes. We are monitoring the situation all the time for new developments and have additional tools available if needed.

Still plenty of jobs
Dalia Narkis, chair of Man-power Israel Ltd, Israel’s largest non-governmental jobs agency

Every time an Israeli company fires five people, it is played up as a headline in the media. The global panic is having a major psychological influence, but the reality is that nothing dramatic has happened yet.

The employment market in Israel has never been as strong as it was in the summer. Unemployment in September was 5.9 per cent — the lowest figure for decades.

We have seen a change over the past month; the forecast is that unemployment will rise to 7% in 2009. But I think in all of Israel there have been only 6,000 layoffs over the past six weeks. Even in the best of times, thousands are fired as companies reorganise and refresh their workforces.

We have fewer jobs to offer, especially in high-tech and finance, and candidates will have to settle for a lower salary. But we are still able to offer something to almost all applicants at all managerial levels in all sectors.

There’s no banking crisis
Saul Djanogly of Djanogly Wealth Management, which advises private investors on investing in Israel

There is no doubt that we are going to see a slowdown. What is important about Israel, though, is that it doesn’t look like there is going to a banking crisis. The only vulnerability of the big banks in Israel lies in their lending to oligarchs such as Lev Leviev and Roman Abramovich. But that’s the only cloud on the horizon.

Israel will suffer, but not as much as other countries. The Tax Reform Act has made Israel a haven for retirees by giving them a ten-year tax break on all non-Israeli income and non-capital gain. It will also encourage a lot of people to move to Israel and run their businesses from there. So you can stay in the UK and help fund the government deficit or you can move to Israel with your lifetime savings and have a ten-year tax-free run there.

Not a recession, not growth - but somewhere in between
Shmuel Ben Tovim, minister for economic affairs at the Israeli Embassy in London

Entering the global crisis, Israel’s starting point could not have been better. All the macro-economic indicators were very strong and so Israel was well prepared to absorb the initial shock — perhaps why the effect on Israel has been delayed compared to other countries.

The slowdown will mainly be the result of shrinking export markets. As a result, we expect a minor rise in unemployment. There are already some redundancies, particularly in the high-tech sector.

Of course, the outlook for 2009 is not as we have experienced over the past few years. The banking sector is solvent and solid but has become more cautious over lending money, which is why the Israeli government is going to intervene. A concern is public savings such as pension and provident funds, which have all suffered losses.

During 2009, we think the Israeli economy will grow between 1.5 per cent and two per cent. It’s not a recession, it’s not growth, but is somewhere in between. This slowdown will probably last for most of 2009.

Well-placed to cope
Daniel Harverd, head of research at Deutsche Bank Israel

Unlike the UK and US, which have enjoyed sustained growth since the early 1990s, Israel went through a deep recession between 2001 and 2003. As a result,

Israel’s major companies became much more efficient.

The banks have a conservative approach to lending. It is rare to be able to get a mortgage above 65 per cent of the value a property and there are virtually no home equity loans.

Israelis portray themselves as always having large overdrafts. In reality, the level of personal debt is much lower in Israel than the UK. Not only do people have smaller mortgages, but the level of savings is far higher, too.”

Israel has a very open economy with well over half of GDP dependent on imports and exports, so after five consecutive years of 5 per cent growth it is clear that Israel will feel the pinch through decreased export orders. Israeli companies, especially in high-tech, have been quick to lay off staff ahead of the storm, and that should see them well positioned.

How the UK and Israel compare

UK Israel
Read GDP growth -1% 4.2%
Consumer Price Index -3.8% 4.5%
Budget balance (% of GDP) -3.8% 1.0%
Current a/c balance (% of GDP) -2.9% 0.1%

Source: The Economist

Last updated: 5:11pm, December 9 2008