Israeli Economy Slowing Down, but Banks Not in Crisis

Long-term prospects more positive in Israel than other western nations
Feb. 12, 2009

The global financial crisis took awhile to cross the continents, but its tentacles have at last reached the Israeli economy forcing the Bank of Israel to revise its 2009 forecast to reflect a .2-percent decline rather than 1.5-percent increase.

The Israeli economy has more easily adapted to hostility than to these external factors. In 2006, the 40-day war with Hizbollah only briefly interrupted an economic boom. But this growth spurt came to a halt in the third quarter of 2008 as the global recession entered the scene.

“The effects of the global financial crisis on real economic activity in Israel are evident,” the Bank of Israel said in a report. “World trade, which exerts a major influence on domestic activity, has dropped, and is expected to fall further.”

The Bank of Israel is forecasting a 6.9 percent drop in exports and a 6.4 percent fall in imports in 2009. Foreign exports make up 45 percent of Israel’s GDP.

According to government figures, the Israeli economy expanded by 4.1 percent in 2008 to a record $190 billion capping off four years of higher than 5 percent annual growth. The slowdown hit Israel when demand for exports plummeted. Foreign companies downscaled their investment projects and consumers reduced spending.

“Israel’s economy is oriented toward export markets and other international activity,” the Tel Aviv Stock Exchange said in its annual report. “It is expected that the global crisis will adversely affect exporting firms as well as Israeli entrepreneurs abroad.”

Even so, Israel’s economy is expected to weather the situation better than many other developed nations.

“It’s going to be pretty gloomy, but it’s not like the United States or Germany,” said economist Jonathan Katz at HSBC. “It will be more of a slowdown than a recession.”

Also working in Israel’s favor is a conservative and stable banking system that is not in crisis.

“Happily for us, Israel’s economy hasn’t caught the three American diseases--consumer and private credit greater than 50 percent of GDP, a bursting real estate bubble, and a bankrupt financial system because of the first two diseases (and other causes)” wrote Ha’aretz financial reporter Guy Ronik. “Americans spent the last decade living well beyond their means. Israelis saved.”

Another factor in slowing the crisis’ arrival in Israel has been the Bank of Israel’s steady hacking of interest rates, down to 1 percent in January from 2.5 percent in November. In fact, investment bank UBS analyst Reinhard Cluse maintains his long-term forecast for 2010 of 2.7 percent growth. UBS said it expects a moderate recovery as early as the second half of the year.

“Following years of prudent fiscal policy, Israel is one of the few countries in (Europe Middle East Asia) where the government now has substantial scope for fiscal stimulus,” Cluse wrote. “After a balanced budget in 2007 and a deficit of 2.1 percent of GDP in 2008, we expect the deficit to rise to 4 percent of GDP or even higher in 2009, thus helping to prevent a more serious decline in growth.”