In consumer surveys carried out in the US on the state of the economy, respondents are usually asked about their political affiliations as well. During Democratic administrations, Republicans tend to have a negative view of the economy, and vice versa.
That is to say, our views about investment exiting from Israel or about the reported deal for Google to buy Israeli cybersecurity company Wiz will be connected to our political stance. In Israel, it’s enough to glance at the business pages of the newspapers to realize that the state of the economy is in the eyes of the beholder. No single truth emerges from the numbers, and they too can be harnessed to a political narrative.
One thing that is subject to contradictory interpretations is the financial position of the government itself. The fiscal deficit is heading towards 8% of GDP, Moody’s and S&P have cut their sovereign credit ratings for Israel, and the risk premium on raising government debt (CDS) has jumped.
Those who seek to present a positive picture, however, will argue, for example, that the risk premium already jumped on the first day of the war, before any economic program was presented, and that it is therefore not really connected to any particular policy but is mainly to do with the security situation we have been plunged into.
Incidentally, that argument is supported by the fact that Israel’s debt:GDP ratio is still expected to stay fairly low (around 70%), in comparison with countries like Singapore (160%), Italy (142%), France (112%), Blegium (106%), and Portugal (104%), which enjoy credit ratings higher than those of Israel.
Strong shekel
One phenomenon that demands attention is the transfer by Israelis of money overseas. The movement of money to overseas investments, which amounted to $2.2 billion in the third quarter of 2023, jumped to $2.9 billion in the fourth quarter and to $3.6 billion in the first quarter of 2024.
This apparently stems from fears for the country’s economic situation, and indicates capital flight, but then suddenly the report comes along of Google’s intention of buying Israeli company Wiz for $23 billion, demonstrating that these conclusions are not clear-cut.
In fact, in the outcome test, since the war started, the shekel has strengthened against most major currencies (according to the Bank of Israel’s basket of currencies), making it even more difficult to adopt a particular narrative. It should also be remembered that movement of money abroad is not necessarily indicative of a weak economy, but is sometimes actually a sign of strength, and it reinforces the country’s sources of income. By the same token, the acquisition of Wiz by Google is not a sign of weakness in the US economy.
We all see the same figures published by the Central Bureau of Statistics, but we draw different concisions from them. For example, the labor market figures for May look amazing. Unemployment in Israel is at a historical low of 3%, which is lower even than the rate before the war, In September 2023. The number of job vacancies has also climbed since then, from 3.7 jobs for each jobseeker to 4.5, and wages have risen by 4.6% (while inflation was 2.1%).
One commentator will tell us that this is evidence of the economy’s resilience, but another will argue that the statistics are skewed by the drafting of army reservists, creating a shortage of labor in the civilian market, evidence of which being the decline in the number of people in employment. Even the impressive figure for the rise in credit card spending in Israel (5% between September 2023 and May this year) and the jump in the proceeds of the retail chains can to some extent be attributed to the fact that fewer Israelis are travelling overseas (so that they spend more at home), emotional spending arising from psychological pressures (to compensate for frustration with the situation) , one-time spending fuelled by government grants (including to reservists), and so forth.
Another economic indicator subject to debate is the stock market. At the beginning of the war, the Tel Aviv 125 Index noticeably underperformed stock indices overseas, particularly the S&P 500 and Nasdaq, exemplifying the damage to the Israel economy.
But the Israeli indices have meanwhile climbed back, and, taking into account that the underperformance was largely due to the low weight of technology stocks and the lack of mega companies in those indices (the two segments that mostly led the rises in overseas market), and adjustment of the exchange rate for comparison purposes, the Tel Aviv Stock Exchange actually becomes evidence of economic strength.
Another matter that gives rise to different attitudes is home prices, which have shot up by 4.6% between Septembers and May. One side looks at this as evidence of the strength of the economy, while the other sees it as an outcome of the damage caused by the war (an expected shortage of building completions), the flight of residents of border settlements to the canter of the country, and one-time government grants.
The Bank of Israel in the middle
In the middle between these two opposing perspectives is the Bank of Israel, which is supposed to be clear of political considerations. Can it be? Even if we assume that the bank’s economists and the members of the Monetary Committee manage to put their political agendas aside, which is very difficult to do, they still have a problem.
The only way of maintaining the Bank of Israel’s independence would be to take into account not only the inflation target, but also the political appearances of its policy, which would make it hard for it to avoid interest rate cuts, regardless of inflation.
Amir Kahanovitz is deputy CEO and chief economist at Profit Finance.
Published by Globes, Israel business news - en.globes.co.il - on July 21, 2024.
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