The gathering storm

Overshadowed by current affairs, a serious israeli economic decline has begun; Israel's politicians must take action.

Tent City Dismantled 311 (photo credit: ben Hartman)
Tent City Dismantled 311
(photo credit: ben Hartman)
Last august, Hurricane irene formed in the caribbean, sucked energy from warm sea waters and smashed rain and wind onto america’s eastern seaboard. The world watched as meteorologists predicted its path with remarkable accuracy, giving new York city Mayor Michael Bloomberg plenty of time to prepare emergency teams and warn residents in coastal areas to flee.
I envy those weather forecasters. as an economist, i see a global storm brewing off israel’s shores. But unlike the weathermen, i can’t predict either its timing or its path. all i can do is offer a few doom-and-gloom observations, which hopefully will totally miss the mark.
Overshadowed by the dramatic social protests, Palestinian UN strategy and turkish belligerence, a serious israeli economic decline has begun. the quarter-to-quarter annualized growth rate of its gross Domestic Product (gDP) has dived from 7.4 percent (fourth quarter 2010) to only 3.3 percent (second quarter 2011).  The slump in business GDP (which excludes government) was even more dramatic for the same period, from 9.1 percent to 2.0 percent.
The causes? These are an almost total halt in business investment, a major decline in consumer spending and a sharp fall in the growth of exports. israeli consumers and business persons are worried by what they read and see on tV and are just not spending. even real estate prices have stopped rising, for the first time in memory.
For the past two decades, it was export growth that drove much of israel’s prosperity. That growth is now endangered. a fourth of israel’s exports are sold to the united states and a third to the 27 european union nations. Both the us and eu economies are stumbling; and, as a result, over half of israel’s sales abroad are at risk. Moreover, in the first half of 2011 Israel sold, officially, almost $1 billion in exports to Turkey (and probably, unofficially, much more, since defense exports to turkey are not fully revealed). With turkish Prime Minister recep tayyip erdogan vigorously seeking (and gaining) adulation in the arab world by attacking israel, those exports will doubtless fall.
slumping exports generated a whopping $8.3 billion trade deficit in the first half of this year. nor is the export threat purely cyclical. There is strong evidence that the vein of export gold israel struck in its ICT (information and computer technology) industry is played out, as india, china and other nations build their stock of R&D engineers. What will replace ict? What is the long-range plan for restructuring and reinventing high-tech? there is none.
The Tel Aviv stock exchange, a leading indicator, has dropped by 24 percent since January 1 and the ta 100 index is now under 1,000 for the first time in years. Industrial production fell by 4 percent in June (latest figure available), and inflation in July was 3.4 percent (annual), nearly double what it was a year ago.
All this bad news occurs against a backdrop of daily self-adulation by Finance Minister Yuval steinitz, whose main refrain to the social protesters has been to claim how well he led israel through the aftermath of the 2007-9 global crisis. and it is true that israel’s unemployment rate, 5.5 percent, is far lower than america’s chronic 9.1 percent rate, and its government budget deficit, 2.6 percent of GDP is less than a third of america’s. But the storm clouds are gathering. i see no evidence that israel’s leaders are preparing for it.
Before World War ii, Winston churchill warned his nation and the world of the nazi threat to world peace. nobody listened until it was too late. after leading Britain to victory, churchill then sat down and wrote a stunning six-volume history of the war; the first volume was called “the gathering storm.”
I’m no churchill. and i would prefer that my country prepare itself for the gathering storm than write later about why it failed to do so. But i’m afraid israel’s politicians are far better at forming committees of inquiry about failure than taking action to forestall such failure and create success. in this, they are not alone; their counterparts in america and europe are equally gifted.
The writer is senior research associate, S. Neaman Institute, Technion.