Despite Global ‘Perfect Storm’ of Bad News, Israel’s Economy Expected to Stay Strong
But the tech sector, which accounts for more than half of exports, is starting to retrench
The economic horizon for Israel is cloudy and obscured. Local and international developments have plunged the country into a period of uncertainty. With a continuous increase in the cost of living, soaring housing and fuel prices, inflation generally, climbing interest rates, and a negative May for the Tel Aviv Stock Exchange, Israel is holding its breath.
Israel managed to weather the storm of previous global financial crises. Both in 2008, when world economies took a hit, and during the COVID-19 pandemic, the Israeli economy remained resilient. Israel is also used to bouncing back from security crises.
The war in Ukraine, global inflation, and world stock markets plummeting, together with domestic hurdles, are now testing Israel.
According to the Bank of Israel, inflation is at 4%. While it has risen in the past year, it remains significantly lower than in many other developed economies. The central bank forecasts do not see it rising much higher in the coming years. Gross Domestic Product dropped slightly in the first quarter of 2022, and although the bank said the economy recorded “strong growth,” it decided to raise the benchmark interest rate.
Professor Elise Brezis, head of the Aharon Meir Center for Banking and Economic Policy at Bar-Ilan University in Ramat Gan, the central bank forecast for the rest of 2022 may be a bit too sunny.
“The current data is still influenced by the past, by money already spent,” she told The Media Line. “But later this year, people will see they have less money – prices are higher, and wages haven’t risen accordingly.”
While the Bank of Israel expects the economy to grow by over 5% this year, Brezis believes the figure, while still positive, will be lower.
The positive forecast shows the economy remaining vital, thus supporting the rise in interest rates that has many in the public concerned. In several interviews, Bank of Israel Governor Amir Yaron said the interest rate will be further increased during 2022.
Unemployment continues to be low. The budget deficit is low, and the shekel continues to be very strong, despite a recent weakening.
Yet, the conditions for what many economists call a “perfect storm” exist globally.
The strength of the economy leans largely on Israel’s booming high-tech sector, which is home to thousands of startup companies and many established tech firms.
“The high-tech is essentially Israel’s lifeline,” said Dr. Alex Coman, head of the Operations Excellence Program at Tel Aviv University. “This helped the country through the pandemic when the tech sector was minimally hit.”
The contribution came in the form of taxes entering the public treasury, both from multimillion-dollar deals that saw the purchase of Israeli tech firms by investors and from above-average salaries which pay above-average income taxes.
According to the Israel Innovation Authority in the Economy Ministry, tech accounts for more than half of exports. The sector produces 15% of GDP, according to central bank data.
“This time around, Israel will be affected by the global conditions, not independent of the world,” said Brezis.
The international bubble started to burst last month. As Israelis saw the Nasdaq Stock Market crash in New York, they buckled up. As the US tech market sees companies laying off workers, or completely shutting down, Israeli companies are carefully eyeing the nearing storm. After years in which money flowed easily, it seems about to slow down significantly.
Salaries in the Israeli high-tech sector are more than double the average in the country.
“Companies will start looking for cheap labor outside of Israel,” said Coman. “This is already starting, with companies outsourcing some of the junior positions.”
At the beginning of May, Israeli grocery delivery startup AVO announced it was firing almost two-thirds of its employees and then later announced it was ceasing all operations in Israel. It also cut back its US activity. The decision was made after company executives realized they would not be able to raise more capital in the current global climate.
AVO could just be the beginning. It is not the only Israeli firm that struggles with attracting new investment. As stock markets plummet, investors are going to be less inclined to take risks on startups. The appetite for risk further drops as interest rates rise around the world.
This has a domino effect that could impact Israel.
Israel also faces a housing crisis. With a continuing rise in demand for real estate and a major lag in supply, prices are soaring. Until this year, interest rates were low, making it attractive to take large mortgages. With every rise in interest rates, there is concern that people who managed to purchase a home will soon not be able to make payments, especially as inflation rises.
“This is a real burden on the Israeli economy,” said Brezis.
But Israel’s greatest challenge may be its political instability. Currently governing is a shaky coalition that could fall any day.
“The government is doing a great job on the economy, but it might not survive,” said Brezis. “It wants to take care of issues, but it cannot. This is the main cause of uncertainty in the country.”
With a fragmented coalition that has lost its majority and has difficulty agreeing on core issues, there is much talk of the need for further reforms but little action.
“It is very complicated to pass laws, to change regulations,” said Coman.
The strength of the Israeli economy leaves room for optimism regarding its ability to weather the global storm. However, this immunity will remain provisional, especially if conditions worsen.