Assessing the GDP

Most of the thousands of rockets rained on Israel may have been successfully and impressively intercepted, but they exacted an undeniable economic cost.

November 23, 2014 07:39
3 minute read.

Shekel money bills. (photo credit: REUTERS)


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The economy has been something of a wonder against the backdrop of global economic stagnation.

When foreign economies – among them international movers and shakers – could not quite shed their lethargy, little Israel continued to grow at an enviable pace.

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All that appeared to change, however, in the third quarter of this year (July through September), when Israel’s economy contracted for the first time in five years. The gross domestic product fell by an annualized 0.4 percent, according to Central Bureau of Statistics data. The economy had not declined since the first quarter of 2009, just as the worldwide credit crunch burst on the scene at its conspicuous worst. Even then, Israel’s GDP decreased by only an annual rate of 0.2 percent.

Have things, unbeknown to most of us, taken a sudden and sharp turn for the worst? Odds are that they have not. Finance Minister Yair Lapid altogether described this as an unrepresentative glitch due to the 50-day battle with Hamas in the Gaza Strip last summer. He is not wrong.

Most of the thousands of rockets rained on Israel may have been successfully and impressively intercepted, but they exacted an undeniable economic cost. Daily life was severely disrupted. Many people stayed close to home, avoided public spaces, shopped less, did not dine out and did not spend money. The business losses were striking. That extended to nose-dives in tourism, exports and the financial marketplace.

There was no way it would not eventually be reflected in GDP figures. The poor third-quarter economic performance, therefore, is hardly indicative of systemic economic ill-health. In the months that followed Operation Protective Edge, commercial, industrial and financial activity are back up and have ostensibly returned back to normal.

That said, this hardly sounds the all-clear. There is no justification for complacency. Our normal is not what it used to be and it already pointed to a marked slowdown before the recent war.

The core concern is the endemic slump overseas. It means less demand for our goods and services. Downturns are contagious. Slumps beget slumps and eventually must affect us. In time, this may bring higher unemployment to our shores.

The probability that foreign fallout will not manifest itself here instantaneously offers scant consolation.

Israeli households already feel the pinch even if not all Israelis identify the cause.

For one thing, slower growth means less tax revenue.

Lower exports are not the only contributor. The real estate slowdown, for instance, substantially shrinks the state’s income straight off. This make balancing the national books more difficult and severely tests the Treasury’s prudence. Officialdom is tempted to loosen the public purse strings at a time of a louder populist outcry for more largesse for social causes – regardless of the need to budget for escalated security challenges.

The upsurge in terrorism, the Islamic State menace from Egypt and Syria, and the unremitting Iranian threat cast their dark shadows. One way or another, heavier defense burdens fall on the taxpayer. These may not materialize in the form of higher direct taxation, but we will pay more indirectly.

In the final tally, we are left with higher expenditures and stagnant, if not diminishing, incomes. The result is less disposable income for most Israelis.

Less disposable income exacerbates recessionary dynamics. With less money to spend, we buy less.

Lower consumption reduces demand. This in turn reduces corporate takings, triggering a vicious cycle.

Some elements in this are plainly out of our control.

Israel cannot avoid the ill-effects of global trends, nor can it inoculate itself against mounting existential dangers around us.

But we can control corporate and union greed.

Companies that raise prices will find themselves losing by undercutting their consumers’ buying power.

Instead of making do with lower profit margins, they will face outright losses. The Histadrut labor federation’s agitation for indisputably justified wage hikes at the lowest end of the pay scale can lead to lost jobs.

Lack of restraint at either end of the continuum might all too easily upset the delicate economic equilibrium.

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