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(photo credit: Ariel Jerozolimski)
For the first time in a quarter of a century, manufacturing productivity is expected to fall, the Manufacturers Association of Israel said Monday, citing the strength of the shekel against the dollar as one of the primary factors in the forecasted decline.
"Manufacturers hire employees based on expectations - they expect a certain number of orders to come in and to be able to grow their market share, but they could not expect the dollar to drop like it has this year," said Shraga Brosh, president of the Association.
Manufacturing productivity is expected to drop 0.4 percent over 2007, after posting gains every year since 1982, including an increase of 5% in 2006.
"This is very bad and is an indication that economic growth may slow down in the near future," Brosh said.
Fostered by economic growth based on an increase in foreign investments, the shekel reached a nine-and-a-half year high against the dollar in May, a factor that forced manufacturers to increase prices, leading to a decrease in the country's export market share and less work to give to the workers. A weaker dollar and a stronger shekel, while it may improve the purchasing power of Israelis, is ultimately not a positive development for manufacturers as many have seen their production costs rise jump considerably.
Even manufacturers who sell their products locally have had to make adjustments.
"We can see that the dollar is not the only factor which is causing manufacturers to raise prices," said Ayelet Nir, chief economist at IBI. "Local consumers can already feel this - mainly in the rise of manufactured food prices - salaries and electricity costs are rising and these factors have also caused manufacturers to raise prices."
While the decrease was expected to hurt the economy, some economists believe the damage won't be all that bad.
"The pace of growth in the manufacturing sector may slow down next year and competitiveness will be lower than other countries, but I do not expect that it will terribly harmful to the economy or to individual manufacturers," said Shlomo Maoz, chief economist at Excellence Nessuah. "The combination of a decrease in productivity and increase of the strength of the shekel against the dollar will hurt exporters, but bear in mind that it will take time to feel the effect in the manufacturing sector - it will probably take about nine months."
Maoz, however, does not expect this trend to continue as he believes the shekel will weaken considerably against the dollar over the next year.
"Within 13 months, the shekel-dollar exchange rate will begin to rise, eventually reaching NIS 4.60-4.70 to the dollar, due to many factors, including the departure of the US from Iraq and fears of a decline in the US and the global economy into recession," he said.
To help reduce the damage and stem the slide, Brosh has requested that the government continue to fund the NIS 600 million industrial investment program it has created; increase the budget of the Chief Scientist's Office from its current NIS 1.2 billion to NIS 2b. next year (of which NIS 300m. will be earmarked for "low-tech" sector companies) and NIS 460m. in direct aid for the country's exporters. Additionally, Brosh would like the corporation tax trimmed to 20% by 2010, instead of the projected reduction to 25%.
"We are calling on the government to take care of the situation and make a few steps to change this direction, Brosh told The Jerusalem Post. "The government needs to support the small and medium-sized exporters to break into European markets - right now they don't have the ability to take immediate action, so they need the government's support in order to move into these markets."
Approximately 75% of the country's export economy is US-based.
Others remain confident the Israeli economy will continue to strengthen.
"I wouldn't be so worried about the decrease in manufacturing," said Dr. Roby Nathanson, director of the Macro Center for Political Economics. "First of all, the decrease does not reflect total productivity in Israel - there are many other sectors, such as services, banking and finance, which continue to grow and I think that the growth in these sectors far outweighs the decrease in manufacturing."
Uriel Lynn, president of the Federation of Israeli Chambers of Commerce, agreed.
"We are talking only about employees engaged in manufacturing - not trade and services and transportation," Lynn said. "There will be a marginal effect on the economy and it may have a marginal effect on the cost of products. If productivity goes down, less will be produced and it will cost more to do so, but within the general cost of manufacturing 0.4% won't have such a big impact."
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