Leo Leiderman: Israel on the brink of recession

Leo Leiderman  picture: Eyal Yitzhar
Leo Leiderman picture: Eyal Yitzhar

Bank Hapoalim's chief economic advisor reveals that April and May's growth figures are as bad as for the first quarter.

Israel's economy is very close to moving into recession Bank Hapoalim (TASE: POLI) chief economic advisor Prof. Leo Leiderman told "Globes" today. He revealed that the very low rate of growth recorded in the first quarter of 2016 (just 0.8%) has continued deep into the second quarter. In effect, if there is no dramatic change in the coming days - the economy will record two consecutive quarters of negative per capita GDP growth, and will be in a situation officially defined by economists as a recession.

With this data in mind, Bank Hapoalim has cut its GDP growth forecast for 2016 from 2.8% to 2.2%. This is the country's first major organization to cut its growth forecast and we must now wait to see if the Ministry of Finance, Bank of Israel and international organizations and credit rating agencies will follow suit. Moody's already announced last week that it sees Israel's weak growth figures as a credit negative but refrained at this stage from changing Israel's credit rating or forecast for the coming months.

Globes: Last year too there was a very weak quarter of 0.3% growth and despite that the year ended with 2.6% growth.

Leiderman: "The year has begun in a very weak way and I'm talking about the first half and not just the first quarter, because we don't see any change in the second quarter and we are already in May so we have figures for the first two thirds of the second quarter. This very much influences the average for 2016 compared with the average for 2015. This is what we call in the profession "end effect." We expect that exports will recover during the year but the moment that the start of the year was at a certain level, low, then it greatly influenced the entire year. So overall we are talking about a correction from 2.8% to 2.2%."

That's no small correction

"Clearly it is a very significant correction."

What is the reason for the correction? Just three months ago we were all relaxed.

"We were too but the 13% fall in exports in annualized terms in the first quarter (without startups and diamonds) was a surprise to us all. We knew there was a problem in the industrial export sectors but that is a figure that indicates weakness in this activity, which by the way is a worldwide problem. You see Asian countries that are influenced by the situation in China but it is reasonable to assume that the influence on us is even stronger because of our focus on areas like technology, pharmaceuticals and derivatives fields that at an international level have looked very weak since the start of the year."

But even according to your latest forecast we are still having positive growth, so why a recession?

"Growth of 2.2% is growth that would perhaps make many countries envious of us but what is worrying is the change, that is to say the strength of it. What is terribly important is to understand that because Israel's population grows by 2% annually, in Israel we are used to defining a recessionary situation as one in which GDP growth is less than the growth in the population, so that in effect the change in GDP is negative."

So we are less than a month and a half from a recession?

"Since it is our estimation that in the current quarter we see figures that are not especially good, so in definition terms we are very closely touching on a recession in terms of the GDP per capita fall. It is important to stress that we are not talking about a general and overall weakness because private consumption continues to be the engine of growth that grew in the first quarter of the year by 4% - and that's what calms us down for now. But to think that the entire economy is dependent on private consumption for sure raises questions. The labor market figures are also excellent and there is a paradox here because unemployment fell below 5% in the latest update. But we can say two things about the unemployment paradox. The export sector is not rich in work in today's Israeli economy. There is employment growth in the public sector and many in domestic services - health, education, and welfare. The second thing is that looking ahead the job market is generally behind macroeconomic developments, and that is to say when any recession begins in the country, the employment market reacts afterwards.

Beyond the headline "a recession is coming" what other significance is there to this new situation?

"First of all regarding the state budget. Now we are preparing the two-year budget and it is clear that any budget is based on macroeconomic estimates and assumptions that are based on forecasts of state revenues from tax collection. There is a very significant connection between growth and revenues because almost every tax system depends on economic activity and there is a very close linkage between growth forecasts and state revenues from taxes."

Published by Globes [online], Israel business news - www.globes-online.com - on May 30, 2016

© Copyright of Globes Publisher Itonut (1983) Ltd. 2016

Leo Leiderman  picture: Eyal Yitzhar
Leo Leiderman picture: Eyal Yitzhar
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