Tel Aviv stock exchange.
(photo credit: REUTERS)
In recent days we have been bombarded by bad economic news. The Chinese financial crisis has resulted in sharp drops at stock exchanges in Europe and the US, as well as at the Tel Aviv Stock Exchange.
The drop in stock prices, which continued in China and Japan on Tuesday, but not in the West, could translate into lower economic growth as corporations become strapped for cash. It also hurt the savings of millions of investors and pensioners.
And the negativity is not restricted to capital markets.
The Israeli economy is growing at a slower-than-expected pace, according to figures report the Central Bureau of Statistics issued last week.
Drops in private and public consumption and exports – particularly in the field of chemicals – contributed to the low growth, which was an unpleasant surprise for government officials.
Israel’s second quarter annualized growth rate of 0.3 percent according to preliminary figures is lower than that of many struggling OECD countries, including Spain and Greece.
“Israel's GDP growth slowdown in the second quarter puts Israel in a position of inferiority when viewed in the context of international comparison, with lower growth than in most developed countries,” a Treasury report stated.
Analysts at the international credit rating agency Moody’s said in a report that they are beginning to doubt whether Israel’s economy will achieve growth of more than 3% this year as originally expected.
Moody’s analysts pointed out the difficulty of confronting Israel’s economic problems – particularly maintaining fiscal discipline – as long as the government coalition is ruling with a narrow majority of 61-59.
The lower-than-expected growth forecast also translates into a higher-than-expected budget deficit as a percentage of GDP, further jeopardizing Israel’s credit rating.
Dangerous for Israel's economy stability are the exceedingly low interest rates, which have made mortgages and loans that feed private consumption particularly attractive.
With an estimated two-thirds of credit extended by the large banks in the form of mortgages and a large chunk being used to fuel consumption, there is a real danger of a credit crisis, should interest rates begin to rise.
Obviously, international trends, which are out of the control of our leaders, have a major impact on the situation locally. But there are a number of measures that this government can take to help improve the economy.
One of them involves the Bank of Israel’s monetary policy. Raising the benchmark interest rate moderately from the present level of 0.1% will, however, have only a minor effect. A monetary development that could have a big impact on Israel is a US Federal Reserve decision, expected in September, to raise dollar interest rates while shekel interest rates remain low. This would result in a further depreciation in the shekel against the dollar, which would be a boost to Israeli exports.
The real solution is not in the hands of the Bank of Israel, rather it is in the hands of our political leaders.
Too much uncertainty remains regarding the state budget. First, efforts must be made, despite the difficulties of ruling with a narrow government coalition, to keep the budget under control. Prime Minister Benjamin Netanyahu must stand up to demands made by his coalition partners.
Second, a substantive housing reform that lowers prices through an increase in supply is absolutely necessary.
Increasing both the extent and the pace of construction is the only way of pushing down housing prices, which are artificially high due to a combination of low interest rates and the uncertainties of the financial markets that are scaring investors out of the stock market and into real estate.
There are some positive signs in the economy, such as historically low unemployment. And the second quarter growth numbers were based on preliminary data that might point to a blip, not necessarily a downward trend in economic activity.
Still, our political leaders must remain vigilant and avoid excessive fiscal spending. Our economic health depends on it