Here are a few things that the general public knows about the state of the Israeli economy in September 2014. First of all, economic activity more or less stagnated during the war, and entire sectors are still having trouble recovering. Secondly, low growth has become the new norm - even before Operation Protective Edge, the Israeli economy was growing only 1.5% a year, and no one in the government appears especially bothered by the fact that zero per capita growth is an optimistic forecast for 2015. Thirdly, Israel is currently in a state of deflation: the August 2014 Consumer Price Index is at the same level as the August 2013 index, and the index, excluding housing, fell 0.7% over the past 12 months.
Once upon a time, such figures in Israel would have led to long meetings, innumerable discussions, and statements by leaders about ways to end the economic stagnation and restore a reasonable level of economic activity. In similar situations in the past, the infrastructure budget was enlarged, or an attempt was made to reach agreement on measures for encouraging growth, but not this time, at least not according to the behavior of Prime Minister Benjamin Netanyahu and Minister of Finance Yair Lapid. Of all the urgent issues, they prefer to focus on two items: an unreal increase in the defense budget, as Netanyahu is demanding, and 0% VAT on purchases of a first apartment, as demanded by Lapid. No one in the government is really talking about the other issues: negligible growth, deflation, the drop in exports, and the quality and quantity of public services. Like the general public, the ministers have no idea how these matters will be addressed.
The relative indifference to questions of economic growth may lie in the unemployment figures. As long as the unemployment rate remains around 6%, the politicians assume that there is no need to worry. The problem is that if and when unemployment starts to rise, it will be too late for them to change the situation.
One way or another, three months before the beginning of the next budget year, there is no way of knowing what its size will be, how big the deficit will be, or how much civilian spending will amount to. Furthermore, nobody has a clear idea of what the government's economic policy is, what its priorities are, or who will bear the burden of paying for the war in Gaza. These things are unknown to the general public, and also to both senior and junior Finance Ministry officials. We hope that the minister is telling them about his plans during his rare visits to his office. Actually, the ministry officials also have a list of wishes, targets, and plans, but at the current level of communication between them and the minister, they have no way of knowing what his thoughts and views are. Today he is adopting a recommendation to impose an excise tax on coal, because senior Finance Ministry officials explained its importance to him, but tomorrow he will remember to oppose it, because someone will explain to him that it carries a political price.
Once upon a time, senior officials knew they could contact the Prime Minister's Office when something went wrong in the Finance Minister's office. That is how it was during the term of former Finance Minister Yuval Steinitz, when Netanyahu functioned as the Minister of Finance of last resort. This time, even this route is blocked, because Netanyahu has decided that he will function as the Minister of Defense of last resort, while leaving the economic job to Lapid. Actually, in the current argument about the budget, the prime minister is behaving like the last general on the IDF general staff, not someone who also bears supreme responsibility for economic policy.
When will someone finally wake up?
On the other side of the road, Governor of the Bank of Israel Karnit Flug is watching all of this, and coming to the conclusion that the Bank of Israel is being left on its own in this struggle. She expresses her views on the budget in public, but as of now, she is having no luck in influencing her dialogue partners. In these conditions, she will continue acting alone, according to her judgment.
Two months ago, when it became clear that inflationary expectations were sliding rapidly downward and the real interest rate was rising, she had to respond by wielding the only tool she had - a cut in the Bank of Israel interest rate. After the interest rate was lowered, the shekel-dollar exchange rate began to respond, crossing the NIS 3.60/$ barrier. This was designed to relieve the pressure on exporters and business in the exporting sectors.
At the same time, the interest rate was cut to 0.25% a year, meaning that the Bank has no way left of using the interest rate if the economic slowdown worsens, or if the shekel again strengthens in the coming months. Flug can take action in the bond market if the slowdown forces her to do so. As of now, all she can do is go on stating her opinion in the hope that someone in the government will become concerned about what is going in the Israeli economy.
Published by Globes [online], Israel business news - www.globes-online.com - on September 16, 2014
© Copyright of Globes Publisher Itonut (1983) Ltd. 2014