Now Israel sucked into Euro mess

By Ben Mitchell, November 17, 2011
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The news has been overflowing with negative stories about the world's economy for what seems like an eternity.

Since 2008, when the bubble well and truly burst, we have seen one long and depressing succession of negative data as the Western economies have stumbled from one crisis to the next. Inevitably, this has had a huge impact on the value of currencies around the world.

The Eurozone has been hampered by chronic and systemic problems throughout, but it is in the past six months that we have seen these problems reach a critical point. The euro has continued to fluctuate significantly against other currencies as a result. However the impact on the British economy has meant that the pound has also tumbled, so holiday-makers flocking to the continent have not seen a great deal of benefit when it comes to their holiday spends.

Among all the struggles, Israel's economy has been an entirely different story. When compared with other developed nations it has fared exceptionally well. GDP is expected at 4.6 per cent this year, far higher than the projections for the US, UK or Europe. Unemployment is at an all-time low and GDP per capita is set for a record high.

Unsurprisingly, in light of this data, the value of the shekel has remained high versus the pound, euro and dollar. However, this could all change fairly quickly.

Exports account for some 44 per cent of GDP in Israel and the fear of a global slowdown, driven by the continuing problems in the Eurozone, is a major cause for concern. The Israeli government has responded to this potential problem by revising its expansionist monetary policy by initially cutting interest rates in an attempt to keep growth high.

The shekel is not immune from the crisis and there are some signs that it is beginning to get sucked in. It has weakened in the past three months and the 2011 forecast has proven to be an overestimation of shekel strength versus the major currencies.

The outcome of the Euro crisis will be a key factor in the fate of Israel's economy as we approach the end of yet another very difficult year.

Ben Mitchell is an international currency specialist at foreign exchange brokers, World First

    Last updated: 11:23am, November 17 2011