As exports struggle, economy faces slower growth
For decades, Israel’s high growth was driven by exports of oranges, diamonds, pharmaceuticals and software. But the picture is changing due to weak global demand and a strong shekel.
Consumer spending is now a critical growth driver. Businesses fear factories and jobs are at risk if exports, which have declined 10 percentage points over the past decade, fall further.
“We are exporting 80 percent less than our peak” a decade ago, said Joseph BenDor, the chief executive of Ben-Dor Fruits & Nurseries on the Jordan River in northern Israel.
Ben-Dor, whose family started the business in 1888, said his main market is Europe, particularly Britain, where his largest customers for plums and other fruits are Tesco, Marks & Spencer, Morrisons and Waitrose. He largely blames a strong shekel, rising water, labor and other costs, and government obstacles for lower sales abroad.
Diamond exports, 25% to 30% of Israel’s industrial exports, have slid 30% in the past few years, mainly on slower global demand, Israel Diamond Exchange president Yoram Dvash said. Exports to China, a key market, have plunged 70% over the past 18 months.
Citing weak global growth that has hurt exports, the Finance Ministry on Wednesday lowered its economic growth forecast for 2016 to 2.5% from 2.8% and trimmed estimates through 2019.
The Bank of Israel last month cut its growth estimate from 2.8% to 2.4% for 2016 and 2.9% in 2017.
When exports are hot, Israel’s economy tends to grow between 4% and 5% a year. With flat or declining exports in 2014, 2015 and probably again this year, growth is closer to 2.5%, well below the average of 4.5% from 20042011.
“If the trend continues, we can witness sustained private-consumption growth, but we will shift to a lower growth rate,” Bank of Israel head of research Nathan Sussman said. “Growth will likely be in the 2.5% to 3% range if it stays this way.”
With the population growing 2% a year, that amounts to per capita growth of just 0.5%-1%.
NO MAGIC PILL
Ten years ago, net exports accounted for 41% of output. Now the ratio is 31%. While that tops the 13% in the United States and 27% for Europe, the decline has strained the economy.
“We need to target growth of 4% to 5%, so if you want to reach that, you need to turn on the engine of exports,” Manufacturers Association of Israel president Shraga Brosh said.
The government needs to invest more in research and development and encourage small- and medium-sized factories to become more efficient through tax incentives, he said.
Ohad Cohen, the head of the Foreign Trade Administration in the Economy Ministry, said there was only so much the government could do. “We don’t have any magic pill,” he said.
Still, the ministry supports exporters with insurance guarantees and in opening new markets. In recent years, it has doubled the number of offices in Asia to 16. Asia now accounts for 22% of Israel’s exports, compared with 31% for Europe and 25% for the United States.
Israel plans to invest in penetrating markets in Africa and Latin America, Cohen said.
Exports excluding diamonds and startups are forecast to fall 1.5% this year after a similar decline in 2015. Much of the weakness has come from Europe, in part because the euro has lost 15% against the shekel since late 2014.
Another issue is that three companies – Intel, Israel Chemicals (ICL) and Teva Pharmaceutical Industries – control nearly half of industrial exports. For various reasons they have trimmed output.
Intel is shifting production to a new chip plant in Israel, while falling demand and prices for potash have weighed on ICL. Teva said its exports are “characterized with monthly and seasonal fluctuations” but are not falling on an annual basis.
Concerned by sluggish exports, the central bank continues to buy dollars to try to prevent further shekel strength. It has bought about $70 billion of foreign currency since 2008, but the shekel has not weakened enough to spur an export recovery.
(Reuters)