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Friday, July 25, 2014

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Economist upbeat about Israel’s economic status

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Leo Lederman

Prior to the global financial crisis that struck in 2008, Israel’s economy was humming along nicely, posting enviable growth rates of six per cent per year.

When the crisis hit, “everybody suffered,” including Israel. But unlike many other developed nations, it bounced back quickly. “Israel is showing a significant degree of resilience,” said Tel Aviv University (TAU) economist Leo Leiderman.

Speaking to financial advisers and supporters of TAU at the downtown offices of Dundee Securities, Leiderman said Israel’s GDP is expected to eclipse those of Canada and the United States in 2013. Israel’s economy is expected to expand by 3.3 per cent, Canada’s by 1.8 per cent and that of the United States by 2.1 per cent. Major European economies, like those in Spain and Italy, are expected to contract in 2013, Spain’s by 1.6 per cent. Israel’s potential is for even greater growth, but its economy is heavily correlated to the world economy and its prospects are hamstrung by the reliance on global conditions, Leiderman said.

Speaking on the outlook for Israel and global markets, Leiderman said one of the reasons Israel avoided some of the worst repercussions of the downturn was its diversified export market: 30 per cent of its goods and services go to the United States, 20 per cent to Asian countries, 29 per cent to the European Union and 21 per cent is sent elsewhere.

“The negative shock can be spread evenly – that has been a plus for us,” he said.

What’s more, Israel had already gone through some of the adjustments developed economies are currently experiencing. In the 1980s it, too, struggled with an oversized public debt – 200 per cent of GDP back then, only 75 per cent of GDP today.

“Things have flipped over. On important fundamentals in a macro [economic] perspective, to how government finances have been managed in a sound way, to the debt to GDP ratio, Israel’s numbers are stable or declining,” he said.

As a result, and despite the country’s well-known security concerns, Israel is seen as a relatively safe venue for investment. “Country risk” can be demonstrated by the premium governments must offer for their “paper” – government bonds. Venezuela, for instance, must offer 6.74 per cent more than the 10-year U.S. treasury rate of 1.8 per cent. Israel, which has never defaulted on a loan, sells its bonds at 175 basis points (1.75 per cent) above the same treasury yield. And for the first time ever, “Israel issued paper for 30 years, 145 basis points above U.S. treasuries – a very low cost of funding,” he said.

By international standards, Israel’s public debt “remains sound,” he added.

Turning to the Israeli stock market, Leiderman said it has been “quite correlated” to the global market, but has “decoupled” over geopolitical concerns, not over economic ones. In 2012, the Israeli market dipped when reports surfaced that the country was considering a unilateral attack on Iran’s nuclear facilities. It bounced back afterwards.

Leiderman, who also serves as chief economic advisor for Bank Hapoalim, characterized market returns in 2013 as “not bad.” In the year to date, investors earned 3.8 per cent from the Israeli market, better than that negative 1.2 per cent in Canada, but not as strong as the 5.2 per cent returned by the Dow Jones index.

Turning to the Israeli social scene, Leiderman noted that Israelis were part of a wider international protest movement, though protests there were entirely peaceful without any violence or even broken windows.

Demonstrations centred on the cost of living, particularly housing costs, which are “too high.”

A four-room apartment (three bedrooms) can run more than $600,000 in Tel Aviv and $460,000 in Jerusalem, he said. It costs an average Israeli eights years of salary to purchase a new home. In Canada the equivalent figure is 3.7 years of salary.

“Clearly there is a problem,” he said. “The solution is to make more supply available,” in part by streamlining the bureaucratic process that hamstrings the release of land and the start of construction.

On the employment front, Israel’s labour participation ratio is comparable to that of the Organization for Economic Cooperation and Development (OECD), 74.2 per cent for Israel versus 70.8 per cent for the OECD.

Two segments of the Israeli population are under-employed, however. Only 45 per cent of Orthodox men and 26.7 per cent of Arab women are employed. But there are changes afoot. Jerusalem’s “Silicon Valley” is hiring more Orthodox men, largely part time and “with good results.”

One of the country’s advantages over other developed economies is its relatively young population, Leiderman said. Only 16.4 per cent are over 65, compared to the working age population of 15 to 64. In Canada and the United States, the number is closer to 20 per cent seniors, and by contrast, 47 per cent of the Swiss population is elderly and 30.9 per cent of Germany’s.

At the low end of the scale, 12 per cent of China’s population and 7.7 per cent of India’s are considered elderly.

Israel should see substantial benefits from the exploitation of natural gas resources, which is “a very positive development.”

In a few years, Israel should be self-sufficient in the resource, saving the country $2.5 billion in imports. “This should boost growth by some one per cent and bring the current account (exports less imports) back to surplus,” he stated.

Turning to Israel’s renowned high-tech sector, Leiderman pointed out that the country “is still a place good for looking for new ideas.” He referred to Brainsway, as an example. It’s a company that has developed a “helmet for the treatment of chronic depression,” which may even be used to help smokers quit, he said.

Putting it all together, Leiderman suggested that “people in Israel are quite happy and satisfied with their lives.”

An OECD study surveyed populations in a number of countries and found that Israelis rated their satisfaction index higher than seven on a scale of zero to 10. That was comparable to the response of Canadians.

Asked by The CJN to square that finding with the protests that hit Israel, Leiderman said the demonstrations were “a generational issue. The proportion of young people protesting is higher than their share of the general population.”

“We can’t avoid the reality that in countries, in recent years, the growth has not been equally distributed. For those working in high-tech industries and multinationals, their income has gone up by much more than those in the middle class and in the domestic services industry.”

The solution, he continued, was to invest in education, particularly “in the periphery of Israel” – the far north and south – “to make sure the schools there and the teachers get more than the average support, so these children have equal opportunity.”

Leiderman’s speaking tour was sponsored by TAU, the country’s largest research university. TAU leads Israel in patents among Israeli academic institutions and is 22nd in the world.

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