A look back and a look ahead
In light of the new year, the 'Post' assembled a panel of experts to discuss predictions for Israel's economy.
Economy Photo: Nimrod Saunders
The local economy is going through difficult, even turbulent, times. The end of the Jewish year 5772 is the perfect time to analyze the trends in the economy over the past 12 months. It is also the time to forecast the economic trends for 5773. For this purpose, The Jerusalem Post assembled a panel of experts to discuss these issues.
The panel consisted of the following members:
Rinat Ashkenazi, senior analyst of overseas markets of the Excellence investment house
Eran Bar-Tal, economic editor of Makor Rishon and senior lecturer in business administration
Ori Greenfeld, head of the economic department of the Psagot investment house
Shauli Katznelson, deputy director general of the Israel Export and International Cooperation Institute
Nissan Levy, deputy CEO and head of the finance division of The Bank of Jerusalem
Gad Propper, chairman of the Israel-European Union Chamber of Commerce and Industry
Moderator: John Benzaquen, The Jerusalem Post
The Jewish year 5772 is coming to an end. There is a Jewish saying that “A year has passed with its curses (maladies); a new year enters with its blessings.” The Chinese when they want to curse someone say, “May you live in interesting times.” Mr. Katznelson, are we living in interesting times, and what from your point of view were the main curses or problems in the past 12 months?
Shauli Katznelson: In this country, we are always living in interesting times. With regard to your other question, the biggest problem from an economic aspect was the huge debt crisis in Europe, which one way or another is affecting the global economy. During the past 12 months, our growth rate fell compared to the previous year.
This is understandable, as our whole economy revolves around our export trade, which amounts to approximately 25 percent of GDP. If exports fall, industry has to cut production and lay off workers, which means a fall in consumer spending, more cuts in production, more layoffs, and more falls in consumer demand.
Mr. Propper, you have wide experience in exporting industrial products. If the markets in Europe and the US are problematic, why not switch to markets in the Far East that are less affected by the global economic crisis?
Gad Propper: My experience in industrial exports is limited to processed foods. We have a problem in exporting food to non-kosher markets because eating habits differ in each country. At Osem, we opened a plant in The Czech Republic to produce processed foods adapted to the tastes and habits of the Central European markets.
With regard to your comment about switching, this is easier said than done. One cannot switch export markets by pressing a button. When you talk about switching markets, I presume you are referring to transferring our export trade or some of it from Europe and North America to Asia. It is difficult to switch exports from one market to another in the blink of an eye. It is doubly difficult to penetrate the markets of the Far East.
Penetrating Chinese markets is very difficult, but a switch is difficult even from markets in the UK, for example, to Germany or Sweden because a product that is suitable for the Swedish market may not be suitable for the German or British consumer and vice versa. So when we talk about switching markets, the problems involved should be taken into account.
I also want to point out that exports are perhaps the main problem, but they are not the only one.
The business sector has insufficient working capital. The banking sector is not as generous with credits as it used to be, and a weakening business sector affects growth.
Mr. Greenfeld, how do you see the current economic situation?
Ori Grreenfeld: The global economy is in difficulty, and this reflects on the local economy.
Our problems derive from the fact that our main export markets are undergoing economic troubles; consequently, they are consuming less and importing less. For us, this is a long-term problem.
Over 30% of our exports go to Europe. The old continent is in the midst of a recession that will last many more years. North America is recovering slowly, and the Chinese economy -- the great white hope of the global economy -- is losing steam.
The economic figures for the past months were satisfactory, but in view of the problems in the global economy, these figures are not sustainable.
We also have a problem with a yawning budget deficit and a weak government that is under pressure from populist elements to increase social spending.
Mr. Levy, do you agree with Mr. Propper that there is a credit squeeze for business in general and industry in particular?
Nissan Levy: Yes, there is. But it is not entirely the fault of the banking system. In the recent past, the business sector was financed by the banks and by the financial markets. At these times it is very difficult to raise funds on the Tel Aviv stock market; consequently, the whole financial burden falls on the shoulders of the banking system.
The second problem is regulatory. We have to raise the capital adequacy ratio to 9% by the end of 2014, and this dampens our ability to extend credits.
In addition, the economic situation in this country demands a more cautious attitude on the part of the banking system. These three elements have a bearing on the level of credit that banks are willing to extend to businesses.
Ms. Ashkenazi, how would you describe the global economy at these times?
Rinat Ashkenazi: I am not overly optimistic. The situation in Europe is very negative. Zero growth on average, and negative growth in some countries.
I do not foresee the break-up of the euro zone because Germany, the dominant force in Europe, is doing its utmost to prevent this from happening.
The situation in the US is much better, but growth is still slow. As for China, GDP is still growing but less than before.
Shauli Katznelson: Our exports to China have fallen.
Gad Propper: The reason the Chinese economy is faltering is very simple. China’s hefty growth rates were export-driven. It stands to reason that if demand for Chinese goods falls in Europe and the US, it will affect China’s growth rates.
Mr. Bar-Tal, how do you see the current economic situation?
Eran Bar-Tal: The main problem is the weakness of the government -- the populist tendencies of the government. The increased social spending and the worsening geopolitical environment will, in all probability, increase the budget deficit. The future of the economy will largely depend on how the government tackles the problem. If they intend to finance the deficit by raising taxes, it will only make matters worse. The correct thing to do is to increase the government’s income by generating growth, which will increase the volume of taxes without the need to raise taxes. And the only way to increase growth is to promote the business sector.
But the government is incapable of doing that.
Twelve years ago the government decided that the private sector would produce 15% of the total electricity production in 10 years’ time. Now, 12 years on, the private sector produces merely 1.5% of total electricity production.
Why? Because the government hasn’t got the nerve to take on the highly organized and militant workforce. Strong economic growth is generated by the private sector. The idea that governments can generate growth has proven to be a failure. Communism failed in Eastern Europe, and the welfare state was a failure in Great Britain and other Western European states.
Furthermore, GDP growth generated by the privates sector widens the socioeconomic divide, and the present government fears the populist reaction like the plague itself.
Mr. Propper, the capitalist system is the best system to generate economic growth, but it also creates great inequalities. In your opinion, what is preferable -- an economy that is less prosperous but more egalitarian or the other way around?
Gad Propper: First of all, I believe that nothing is equal in this world. I remember many years ago my father and I drove to the North. On the way, we went through an avenue of trees that had been planted a few years before. My father said, ‘Look at those trees. They were planted at the same time in the same soil. They are getting the same water, yet none of them have developed equally. Some are taller, some are thicker, some have more verdant leaves, and some have longer branches. None are exactly the same.’ The same holds true for human beings. They are equal as human beings as the children of God, but no two are the same -- not only physically but also mentally. There are some who are good at business and are successful and wealthy businessman, others are good at acting, at soldiering, etc. Some are good as simple workers, etc. There is no equality in ability; consequently, there can be no socioeconomic equality. We have to strive for a system that as much as possible gives equal opportunity to all, especially through the education system. We should have a system in which everyone has an education, a roof, food and health care. In a free society, there will always be those who have more than others.
Panel, what do you expect of the local economy in the coming 12 months?
Rinat Ashkenazi: I expect that GDP in the coming 12 months will grow by 2.5%; inflation by 2%; interest rates will go down slightly; and the Tel Aviv stock and bond market will be volatile.
Ori Greenfeld: I agree with my colleague. The stock and bond market will be very volatile. With regard to growth, I am more optimistic, I predict a growth rate of 2.9%.
Nevertheless, there is a big element of speculation in these predictions, given that everything that happens here depends on what will happen in the US and Europe.
Eran Bar-Tal: The global economy, especially Europe, will go through very difficult times. This is a very good opportunity to push through necessary but unpopular measures. If things are really bad overseas, the public in general and its elected representatives in particular will realize that these measures are absolutely necessary.
Shauli Katznelson: The expected current economic situation in Europe, North America and the Far East will have a very negative effect on exports. I think the government should help exporters penetrate new markets and thereby prevent layoffs. It is preferable to spend taxpayers’ money to promote exports, which creates jobs, than to pay unemployment benefits.
Nissan Levy: I expect the government to increase competition in the banking system and to increase the number of haredim in the workforce.
Gad Propper: I don’t want to make any predictions because there are many variables, such as the economic situation in the US and Europe, Iran and the coming elections in Israel. So I will limit myself to wishing us all a year of health and happiness.