Terrific growth figures don’t tell the full story

This is no time for reckless self-satisfaction of the sort that would tempt us to throw caution to the wind and disregard common-sense budgetary restrictions.

Money 311 (photo credit: Bloomberg)
Money 311
(photo credit: Bloomberg)
To judge by Israel’s gross domestic product growth in the last quarter of 2010, our economy is doing very well indeed. In fact, we are doing better than other OECD countries, and better than we ourselves had been doing in the previous four years.
Prime Minister Binyamin Netanyahu and Finance Minister Yuval Steinitz have been quick to toot their horns, and not entirely without justification. The surprisingly stellar statistics released late last week, Steinitz judged, reflect “the success of the government’s original and responsible economic policy, including the two-year budget.” He added, “With the good sense to maintain budget discipline and cooperative relations between the various economic forces, Israel can sustain this pace of growth.”
If growth were maintained for an entire year at the rate of 2010’s final quarter, it would reach the 7.8-percent mark in annualized terms. When calculated in terms of 2010’s second half, Israel’s economy grew by 5.6%. Real growth for the entire 2010 was 4.5% – still significantly better than in most developed economies.
To put this into perspective, Israel’s economy grew by a mere 0.9% in 2009. The German economy grew by 3.6% in 2010, Japan by 3%, the US by 2.9% and France by 1.5%.
This is all the more astonishing given that no projections came close to predicting Israel’s real economic success.
The secret, to some extent, lies in the nature of the economy’s growth engines. These weren’t Israel’s usual mainstays, such as exports, but mostly private consumption and investments, which are harder to calculate and anticipate. Herein also appears the fly in our ointment.
Much of the seemingly splendid growth, on closer inspection, was fueled by increased local spending – including via greater imports and a further swelling of the already engorged real estate bubble.
The sort of expansion experienced here in recent months isn’t necessarily the healthiest, therefore. It indicates rising domestic standards of living and a feverish economy – one that already precariously balances on the brink of an inflationary anomaly. This is the case even though odds are that the 7.8% growth in the last quarter of 2010 was something of a fluke, unlikely to be replicated during 2011.
NEVERTHELESS, GROWTH here in 2011 is still expected to be higher than elsewhere in the Western world. This is why it is expected that the Bank of Israel will now have to raise interest rates again. This per force will once more hurt exporters, as higher interest rates make the shekel more attractive to foreign investors and currency speculators. They are tempted to buy shekels to earn our higher interest rates. Thereby the shekel’s value is artificially appreciated, lowering the already shrunken profit margins of exporters.
Israel’s exporters are hurting – as the latest figures underscore, despite their overall rosy tint. This becomes patently obvious when we scrutinize the statistics. In annual terms, our exports are up by 3.7%, a lower rate than the figures for the entire economy, with its private consumption and real estate factors.
The overall picture features other worrisome elements, too. Inflation is up by 3.6% for the past year alone. The picture is gloomier still if we compute the cost of living without lower seasonal produce costs. Any householder stocking up on basic provisions can attest to the inflationary spiral, to say nothing of hikes at the gasoline pump, higher water and electricity bills and skyrocketing municipal rates. To this should be added the burgeoning pressures for higher wages, along with the still upward-bound housing costs.
In other words, the latest growth figures – impressive and heartening as they are after the palpable threats of global recession during 2008 and 2009 – are by no means the whole story. The last thing they ought to inspire in us is complacency. If anything, they should inspire a nagging sense of unease.
Most importantly, this is no time for reckless self-satisfaction of the sort that would tempt us to throw caution to the wind and disregard common-sense budgetary restrictions. Above all, this is the time to stay vigilant, not overspend and not foolishly clamor for higher salaries, which are sure to fan inflationary flames out of control.
CORRECTION. Our Friday editorial referred to reported US willingness to support a toned-down version of a UN Security Council resolution censuring Israel for “settlement activity.” In fact, the US was reportedly ready to support a statement by the president of the UN Security Council, not a resolution, to that effect.