Israel facing economic slowdown

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By Konstantin Rozhnov Business reporter, BBC News

Politicians have been concentrating on non-economic campaigning

Israel is holding general elections on 10 February, and the campaign has been dominated by security, peace talks and foreign policy questions, rather than the economic problems the country is facing.

The Israeli economy has been hit by the global economic crisis, though with some delay and not as hard as many parts of the world, and is likely to contract in 2009 after several years of strong growth.

Analysts say that for several months politicians have not been thinking about the economy, concentrating on the elections and the Gaza conflict.

"We will hear about the economy only after the elections," said Zeev Khanin, a professor at the Department of Political Studies at Bar Ilan University.

Last month the Bank of Israel revised its 2009 forecast for the Israeli economy downwards; it now expects it to contract by 0.2%, instead of growing by 1.5%.

In 2008, according to government figures, the Israeli economy expanded by 4.1% to a record 715.8bn shekels ($190bn) after four years of over 5% annual growth.

"The effects of the global financial crisis on real economic activity in Israel are evident," the Bank of Israel said.

"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."

Engine of growth

World trade, which exerts a major influence on domestic activity, has dropped, and is expected to fall further Bank of Israel

The Israeli economy hugely depends on the global demand, as exports are the main engine of economic growth, making up 45% of GDP.

But at the end of 2008, demand for exports plummeted, as companies downscaled their investment projects and consumers reduced spending dramatically.

"World trade, which exerts a major influence on domestic activity, has dropped, and is expected to fall further," said the Bank of Israel.

In 2008 exports grew by just 3.6%, after growing by 8.5% in 2007. The Bank of Israel is forecasting a 6.9% drop in exports and a 6.4% fall in imports in 2009.

But despite the drop in exports, analyst say the economic crisis in Israel is milder than in Britain or the US.

One of the key differences is that the country's banking system is not in crisis.

Acknowledging problems

To tackle some of the problems fuelled by the global economic crisis, Israel's government has unveiled several economic stimulus measures.

They include providing hundreds of millions of shekels to the Israeli high-tech sector, one of the largest in the world and a key engine of growth for several years, and giving multi-billion guaranties to Israeli banks.

They [the government] will have to change their psychology and acknowledge that something needs to be done. They will have to acknowledge that economic problems do exist Alexander Eterman, Israeli economist

Besides, at the end of January the Bank of Israel lowered its key interest rate to a record low of 1.75%.

However, Alexander Eterman, an Israeli economist and financial analyst, says that the government has not yet worked out a full-scale economic plan.

"They will have to change their psychology and acknowledge that something needs to be done. They will have to acknowledge that economic problems do exist," he says.

Different approaches

Professor Khanin from Bar Ilan University points out that the major Israeli parties have different approaches to the economy.

He says that centre-left Labour Party "would prefer to take President Obama's path" and support a significant increase in budget spending to reduce the impact of the slowdown.

In contrast, the centre-right Likud party believes that Israel's economy will be able to deal with problems on its own, Mr Khanin says.

"Likud leader Binyamin Netanyahu favours downsizing Israel's budget, cutting taxes and reducing interest rates to almost zero," he notes.

Mr Netanyahu, who, according to recent polls, has a good chance of becoming the next prime minister, also advocates economic development for the Palestinians as a necessary pre-condition for peace talks.

The centrist Kadima party will go for a combination of the two approaches, Professor Khanin adds.

Gaza conflict effect

Israel's Tourism Ministry has reported a 32% rise in tourist numbers, as a record 3.03 million people visited Israel in 2008.

The spending on the war in Gaza was relatively small, and it would be easy not to notice it if the current general conjuncture was not so bad Alexander Eterman, an Israeli economist and financial analyst

The figure has been steadily rising in recent years, mainly due to an easing of tension in Israeli-Palestinian relations.

Analyst are now trying to see whether the three-week Israeli operation in the Gaza Strip, which started at the end of December, has hurt the tourism industry in particular and the economy as a whole.

Professor Khanin believes that "in the past five or six years Israel's economy learned to live without politics", not paying too much attention to peace talk outcomes and bomb blasts.

But Mr Eterman points out that the current situation is very different from 2006, after the Lebanese conflict, because the economic environment is now more challenging .

Crisis-stricken investors have dramatically downsized their investments into emerging markets, and Israel's capital inflows have also fallen.

According to some estimates, the cost of the whole three-week Gaza conflict for Israel was about the same as the cost of a day in Iraq for the US.

"The Lebanese conflict was very expensive, but in the following months Israel was flooded with money," says Mr Eterman.

"The spending on the war in Gaza was relatively small, and it would be easy not to notice it if the current general conjuncture was not so bad."

Israel has been too busy with the election campaign and its relations with the Palestinians to be paying a lot of attention to its economy.

But the economic problems will add to the next Israeli prime minister's headaches, whoever wins the election.