Brosh: Growth is a bubble based on bank loans

Shraga Brosh, photo: Manufacturers Association
Shraga Brosh, photo: Manufacturers Association

The Manufacturers Association president: We always said that this growth is not sustainable and even dangerous.

The state is missing an opportunity to take advantage of the one-time surpluses in tax revenue to invest in encouraging real growth and combat over-regulation, Manufacturers Association of Israel president Shraga Brosh asserts. Brosh was responding to the findings of a review published yesterday by Ministry of Finance chief economist Yoel Naveh, who analyzed the reasons for growth in private consumption in Israel. Naveh found that cheap credit was financing the rapid growth in consumption of luxury products, especially among the lower income brackets, and compared the situation to the state of households in the US before the bursting of the sub-prime bubble in 2008.

"It's outrageous for the Ministry of Finance chief economist to suddenly discover that credit to households has been going crazy in the past two years," Brosh says. "We said a year ago that this growth was not sustainable, and even dangerous, because it's based on taking money from the banks - because the money eventually has to be repaid to the banks."

"Globes": So all of this growth is fake, and it all comes from the public's debts?

Brosh: "That's clear. All of the private consumption is coming from an increase in credit to private households. Credit to private households grew by NIS 2.5 billion in the fourth quarter of 2016. They take money from the bank, buy cars, and it's as if growth increased. On the other side, however, let's think how they will repay those loans: if they increase productivity, wages rise as a result, and they have money to pay it, that's fine. But if, heaven forbid, that doesn't happen, when the date comes for repaying the loans, they will have to cut expenses and take their child out of hobby groups, so that they have money to repay the loans. There's no reason for enthusiasm about growth based on private consumption."

The export figures are not bad.

"Today's export figures don't comfort me, because what you see today in exports is deals that were made a year or 18 months ago. In another year, we'll discover that exports have fallen substantially - certainly exports of goods."

So the picture arising from the macroeconomic data is misleading.

"Correct. For example, the employment figures show that there's almost no unemployment. See where those workers have been hired over the past three or four years - it's not in the manufacturing sectors - not in industry, hotels, construction, or agriculture. It's in services and the public sector. Tax revenues have grown, but it's because they bought cars. It's a temporary thing, because can you buy cars all your life?"

Don't Kahlon and Netanyahu realize that?

"Don't ask me that. Ask me about the facts. Exports are declining. The shekel has appreciated 15.5% against the basket of currencies in the past two and a half years. 15.5%? The Bank of Israel said that every 10% of shekel appreciation against foreign currencies is equivalent to a 4% decrease in exports."

The Bank of Israel is buying dollars and drawing criticism. Meanwhile, the negligible interest rate is fueling the credit boom, debts and buying, and you want the interest rate to go down further to weaken the shekel?

"No. The Bank of Israel is doing what it can. I'd like it to buy a little more (dollars, A.B.), but I've got no complaints about it. What has to be done isn't in fiscal policy. The real solution is increasing productivity. The shekel appreciation against the dollar and the euro is detracting from my ability to compete, so how can I increase my ability to compete? By increasing productivity."

Increasing productivity is a nice slogan, but in practice, it takes years.

"It's true that it takes 2.5-5 years to see results."

What politician wants to do things that produce results only five years from now?

"That's exactly the point. You can always say, 'It's long-term,' and do nothing. I think we have to do the long-term things first, because they won't have any effect tomorrow morning. But we've been talking about this for three or four years already. I'm leaving a Knesset debate now that began in 2015."

Meanwhile, should the public be allowed to continue wallowing in debt?

"Unfortunately, it's liable to prove a bubble. It will blow up in our faces, so you can't avoid dealing with increasing productivity. Take this period, when state tax revenues are high because of the cars, and use the money to invest in real growth, which takes years to generate."

What are the three most important steps the government should take?

"Massive investment in technological education, capital investments and modernization of equipment, and R&D - and cutting regulation like crazy."

Published by Globes [online], Israel Business News - www.globes-online.com - on June 7, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

Shraga Brosh, photo: Manufacturers Association
Shraga Brosh, photo: Manufacturers Association
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