Unemployment rate in Israel (5 years).
(photo credit: none)
Recent published economic parameters indicate that
the Israeli economy is on a path toward stabilization. However, there
are still some economic risks that may threaten the domestic economy in
the short run, and have an impact in the medium-long run.
The Risks Still Exist:
The major risk in the short run is the decrease in demand for
Israeli goods and services (mainly technology) and the existing
probability of a systemic risk, mainly from the United States
the European Union
. The other risks include rising unemployment, sooner
than expected interest rate hikes, and future tax increases due to the
rising of budget deficit. These risks support the view that the
recovery will not be a V-Shaped.
There are two high-probability scenarios: the first one is a
W-Shaped recovery. This means that the period of recovery and expansion
will be relatively short lived - unlike in a normal business cycle that
normally lasts more than 40 months. The second scenario is prolonged
and anemic recovery that will be followed by at least 2-3 years of
feeble economic growth. Leading Indicators Rise, Led by Private Consumption and Export:
Since the beginning of 2009, there are increasing signs that the
recession's trough is behind us, and we are heading toward a recovery.
The Israeli investors received a "ratification" that the domestic
economy is financially stable after the credit rating company Standard
Also, domestic indicators such as private
consumption, housing sales, and various fields of industrial production
suggest that some industries stabilized in the second quarter.
Moreover, the leading indicators index rose by 0.2 percent in
June 2009 - the first increase since July 2008. The rise in June was
due to an increase in exports. This is a good indicator since the
export sector is the most important growth-engine of the Israeli
economy. However, does it really signify a turning point?
Despite the encouraging signs, investors cannot ignore the fact
that the risks still exist and most likely will have implications in
the medium-long term. First, the international trade sector remained
very vulnerable. Second, there is still high uncertainty regarding the
future developments abroad of the financial and credit market. Since
the Israeli economy have a high dependency on demand from abroad, any
major external shock will have a great effect on the economy.
What about the Internal Problem?
Even though the consumption sector shows signs of stability,
there are internal risks that will most likely hurt consumers in the
medium term. First, companies continue to cut operational costs and
fire workers. The unemployment rate increased in May to 8.4% - the
highest rate in the last 3 years, and it is expected to rise to 9% by
the end of this year.
The implications will be a reduction of total demand and a
decrease in government's revenue from taxes, which will push government
deficit further up. The government will have to increase taxes again in
2010 in order to decrease its deficit. In addition, if inflation will
remain high the bank of Israel (BOI) will raise interest rate and/or
reduce money supply to control inflation. According to the Makam Market
(Zero-coupon notes), BOI is expected to start raising rates by the end
of the year.
Weak labor sector, tax increases and raising interest rates
will have a negative effect on consumers and the business sector,
including on housing. These factors might lead to a second phase of
contraction already in 2011-2012 or to a long period of anemic growth
rate, which will have a negative effect on the stock market as well.
The writer is Chief Analyst and Strategist at Alumot-Sprint Investment House and also a regular writer for several leading financial papers and Web sites