Wrong and right

September 27, 2015

The Israeli economy has stalled. There is no growth. Exports are falling. The outlook is bleak. In fact, Israel is doing even worse than Greece.


These supposed facts filled the media on the days after Rosh Hashana and triggered some discussion as to why the economy is in such a sorry state and what can and should be done about it — seemingly the right attitude for the AseresYemei Teshuva.


Indeed, the data about economic growth during the second quarter of 2015, published on Tsom Gedalya, were pretty miserable. GDP grew at an annualised rate of only 0.1%. Since the Greek economy somehow had a good quarter, it was technically correct to say that “we are doing worse than Greece”. However, this is a very partial presentation, based on a mixture of deliberate distortion and sheer ignorance. Let’s review those ‘facts’ and provide some context.


The second quarter data were originally published in mid-August, so the Tsom Gedalya data were only a revision of the original numbers. Unfortunately, the first estimate was bad — growth of 0.3% — and the revision was even worse (0.1%). But GDP data come with a ‘health warning’ printed on them — that the quarterly data are very volatile and it is wrong to read too much into them.


Earlier this year, the data for the last quarter of 2014 were published, showing growth of some 7%! Did this mean a tremendous boom was underway? Not at all — this was a rebound to the zero growth recorded in the third quarter of 2014, when Operation Protective Edge in Gaza was underway.


Halves and quarters

Interestingly, the data for the first half of 2015 — as opposed to the first or second quarters on their own — showed growth at 2.5%, exactly the same as in the second half of 2014. That proves how volatile the quarterly data are and why they should be treated with care.


There are reasons why the second quarter data were especially poor, but let’s look at the broader picture: growth ran at a 2.5% rate for the entire year from mid-2014 to mid-2015. This is not good, but it’s also not bad. It’s much better than most developed countries, especially in Europe –yet the Israeli economy can and should be achieving more.


As for exports — yes, they fell, but so did imports. The entire world is facing a tough situation in which world trade is shrinking, which is bad news for everyone, but especially for small, export-oriented economies like Israel. Nevertheless, Israel’s ‘external sector’ — the country’s business with the rest of the world — is doing very well.


Old bad news wins

The key measure of the external sector is the current account and the latest data on this, covering the second quarter of 2015, were published on the very same day, at the same time as the revised GDP data. Because they were new news, they should have received more coverage than the GDP data, which was warmed-up old news. But the GDP data was bad news — and that always trumps good news, which is what the current account contained.


The surplus on the current account was $2.6bn for April-June, bringing the total to over $5bn for January-June. This is much less than the $7bn surplus in the first half of 2014, but the decline reflects the woes of the tourist sector, hammered by the Gaza war and by the problems of Russia and Ukraine, as well as other factors.


Nevertheless, that’s a large surplus, with Israel benefiting greatly from the collapse in energy and commodity prices, as discussed in previous columns. In simple terms, it means that ‘Israel Inc’ is running at a profit — with employment expanding and wages rising.


So, yes, there are problems — mainly because the Israeli government is not functioning properly and because the world economy is not in good shape. But understanding what you are talking about and keeping a sense of proportion would make for a much more useful debate on what’s wrong — and what’s right.

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