Israel’s Economy in ‘Good Shape’ Amid Signs of Global Downturn
i24 News – Israel is well-positioned to ride out a potential global economic recession powered by the strength of its high-tech industry and abundant Mediterranean gas reserves, experts tell i24NEWS.
“The Israeli economy is stronger than in other countries, due to good fiscal and monetary policy, and to the gas we have,” said Prof. Elise Brezis, head of the Aharon Meir Center for Banking and Economic Policy at Bar-Ilan University.
The US Federal Reserve and European Central Bank have moved recently to try and tame sky-high inflation that has rattled financial markets and sent the S&P 500 into bear market territory.
The Bank of Israel is expected to follow the Fed in raising interest rates to combat inflation, but how much of an impact will it have on Israel?
“The optimistic scenario is that the hike is sufficient to stop inflation in the US and that it is also sufficient to stop inflation in Israel,” said Dr. Raphael Franck, a senior lecturer at the Department of Economics at the Hebrew University of Jerusalem.
However, the professor cautioned that even if an interest rake hike stops inflation, Israel is not immune to what is happening outside its borders.
“Israel is a small, open economy and most of Israel depends on trade. As countries experience a downward trend then Israel will also experience this downward trend,” Franck forecasted.
At this point, the focus is on countering the rising costs of goods and services.
Israel’s inflation rate in May was 4.1 percent, according to the Central Bureau of Statistics (CBS). That beat market forecasts of 4.3 percent, but was still the highest rate since June 2011 and exceeded the Bank of Israel’s annual target range for inflation of 1 percent to 3 percent.
In comparison, a year ago in May 2021 Israel’s inflation rate was just 1.5 percent. That percentage has been steadily rising over the past year.
Prof. Amir Yaron, governor of the Bank of Israel, spoke on June 21 about inflation at the Israel Democracy Institute’s annual Eli Hurvitz Conference on Economy and Society in Jerusalem, emphasizing that while Israel has a lower inflation rate than other equivalent countries, the Monetary Commission at the Bank of Israel “is determined to apply policy that will return inflation to its target levels.”
Israel became a member of the Organization for Economic Cooperation and Development (OECD) in 2010, becoming the second west Asian country to join the intergovernmental organization after Turkey.
The OECD paints an optimistic picture for the country’s 9.2 million citizens in its economic forecast summary for June of this year, with GDP projected to grow by 4.8 percent in 2022 and 3.4 percent in 2023.
While acknowledging that a protracted conflict in Ukraine following Russia’s military invasion could adversely impact Israel’s economy, the OECD cites the Jewish state’s booming high-tech scene, post-pandemic tourism and self-sufficiency in natural gas as among the reasons for continued stability.
Israel could even benefit from the Ukraine-Russia conflict with increased defense exports, according to the OECD report.
“The strength of the high-tech sector will continue, with exports and investment growing at a robust, albeit more moderate, pace,” the OECD predicts, adding that “the strong labor market recovery will support consumption growth.”
Avi Weiss, president of the Taub Center for Social Policy Studies in Israel and professor of economics at Bar-Ilan University, cites Israel’s high-tech sector as one of the main engines driving the Jewish state’s robust economic growth.
“Israel came out of 2020 and 2021 much better than anyone had expected. The growth in 2021 was completely unexpected by anybody,” Weiss told i24NEWS.
“The labor market got back to where it was before the pandemic in mid-2021 when the original forecast deemed that it wouldn’t get there until 2023 or 2024. Israel just came through with flying colors, and a lot of that has to do with the ability to increase high tech.”
Israel’s unemployment rate stood at just 3.5 percent in April, according to CBS, after two years earlier shooting up to a record high of more than 24 percent during the first COVID-19 lockdown.
The high-tech sector employs 362,000 in the industry representing 10.4 percent of the country’s workforce, according to a recent report by the Israel Innovation Authority.
“High tech is a much higher percentage of workers than anywhere else in the world,” Weiss noted.
Natural gas discoveries in the Levant basin of the eastern Mediterranean have insulated Israel against rising fuel prices, with natural gas accounting for 40 percent of total energy supply, according to OECD data.
Israel is also increasing its natural gas exports, signing a memorandum of understanding in Cairo in June to export natural gas to the European Union for the first time via Egypt.
The ability to export natural gas is “part of the resilience package,” Weiss emphasized.
Despite Israel’s strong economy, there are “structural problems” that should not be overlooked, according to Franck, including an “inefficient real estate market.”
The lack of affordable housing has sparked demonstrations, with young Tel Avivians pitching tents on Rothschild Boulevard in June to protest soaring housing prices.
The Central Bank of Israel raising interest rates to curb inflation could help lower housing prices, according to Weiss, who sees many positive indicators for Israel’s economic prospects overall.
“Because the economy is so strong and the labor market is so strong and employment is so high in percentages and unemployment percentages are so low, the resilience of the Israeli market is pretty well proven,” Weiss said. “All told, the economy is in good shape.”