The Central Bureau of Statistics did Israelis a favor today by reminding them that the local economy is on the verge of a recession. Indeed, while the prime minister and the Minister of Finance are dueling over the defense budget and 0% VAT on new apartment purchases, the Bureau published its forecast for growth this year, predicting GDP growth of only 2%. Actually, growth at the end of the year may be even lower if it turns out that the trend data used by the Bureau were overly optimistic. It must be mentioned in this context that the Bank of Israel's State of the Economy Index was unchanged in August, meaning that the economy did not grow last month. Even if the Bureau's forecast is eventually vindicated, however, it means that the economy did not grow at all in terms of per capita GDP. In other words, we are on the verge of a recession, a rise in unemployment, and a contraction in business activity. Business product rose by only 1.6%, i.e. negative growth in per capital business product. This is an alarming figure at any time and in any condition, but when the government is behaving as if the matter were of no concern to it, and Minister of Finance Yair Lapid is busy shoring up his prestige, the result is much more serious.
In order to put things in their proper perspective, keep in mind that in 2011, when the Israel economy realized that it had escaped relatively unscathed from the great global financial crisis, GDP soared 5.8%, and business product by 6.8%. The direction has been downward ever since, and the growth rate this year will be the same as in 2009, when the world was experiencing a very severe financial and economic crisis. GDP rose 1.9% that year, compared with 2.0% this year. Growth in OECD countries that year, however, was minus 3.5%, while it is plus 2.2% this year. In other words, the global economic situation may explain part of what is taking place in the domestic economy, but the actions and failures of the Israeli government are also responsible.
A clear indication can be obtained from the development of the elements of GDP. The sharp downturn in growth in 2014 can be explained by a swift decline in investment and residential construction. The government, the prime minister, and their economic policy (or the absence of one) bear full responsibility for this.
What is very alarming in this situation is the behavior of IDF staff generals, Minister of Defense Moshe Ya'alon, and Prime Minister Benjamin Netanyahu. In the absence of growth, an NIS 11 billion budget supplement means in increase in the ratio of defense spending to GDP, at the expense of what are called "civilian uses," meaning education, health, welfare, and investment in infrastructure. When the army demands a larger proportion of the GDP pie, the people are the ones who must do without these resources. Any other way of presenting this situation is simply misrepresentation and deception.
Furthermore, the attempt to increase the proportion of defense spending will cause a decrease in the government's civilian investments in an attempt to maintain the level of regular civilian spending. The reason is that cutting regular spending has immediate political consequences. Sacrificing future growth by cutting investment, on the other hand, is regarded by policy makers as more tolerable. In other words, we have not only negligible growth, but also a deliberate reduction in the economy's ability to return to reasonable levels of GDP growth in the future.
Published by Globes [online], Israel business news - www.globes-online.com - on September 22, 2014
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