Foreign trade, 2006-August 2008
($ billion, excluding diamonds, seasonally adjusted data)

Foreign trade should be experiencing some major changes at present, firstly as a result of exchange rate developments – the strengthening of the shekel against most major currencies – and secondly, as a result of the global slowdown together with parallel initial signs of a slowdown in Israel.

The strengthening of the shekel makes Israeli exports less competitive abroad, wh ile the global slowdown would normally reduce the demand for Israeli exports. As a result of this combination of factors, we would expect Israeli exports to be declining right now. The same strengthening of the shekel makes imports into Israel less expensive, thereby increasing the demand for them. However, an economic slowdown in Israel would generally reduce the demand for imports. The combination of factors at work, which offset each other, would be expected at least to slow the increase in demand for imports.

Despite these expectations, the graph shows the major components of both exports and imports – industrial exports and raw material imports – not experiencing any signs of decline or slower growth in 2008. Does this mean that there are no exchange rate and slowdown effects at work?

To answer this question, we have to delve deeper into recent data on exports and imports. Firstly, regarding exports, the trend rate of growth of industrial exports has slowed somewhat during 2008 – to 1.6% in August, compared to an average 2.5% monthly in the final quarter of 2007 – but st ill remains high. However, what is noticeable in 2008 is a fairly sharp decline in the share of hi-tech out of total industrial exports – from 46% in 2007 (and from 48.3% in 2006) to 41.4% in January-August 2008, the lowest share since 1997. It was expected that the exchange rate and slowdown effects would be harsher for hi-tech exports than for other components of industrial exports: the current situation remains tolerable but it could deteriorate if the shekel does not continue to devalue (as it did during August) and the global slowdown worsens.

In the case of imports, the evidence regarding the influence of the two effects – particularly the slowdown effect – is clearer. It is true that raw material imports are st ill not showing signs of slower growth (though even here, the trend rate of growth did slow to 0.8% in August 2008, compared to an average 1.3% in the final quarter of 2008), but two other major components of imports are suffering declines in trend during 2008 – imports of investment goods since May 2008 (with the trend decline accelerating from month to month) and imports of consumer goods since Apr il.

Investment goods ( Israel imports some 70% of its total investment in machinery and equipment) are a reliable indicator of industry's expectations of the future. The recent decline in consumption goods imports is in part a reaction to the sharp increase in these imports (especially of durable goods, which are also mostly imported) in late 2007 and early 2008, in response to the stronger shekel, but could also reflect initial signs of a slowdown in overall consumption, as the effect of the slowdown kicks in.

Even if the exchange rate and slowdown effects on foreign trade have been fairly limited up to now in 2008, they could well become more evident in the months ahead.

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