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What's with the Israeli consumer?
Consumer Confidence Index, 2003-November 2008
(April 2002 = 100)
One of the main signs of the global economic crisis - certainly in the US - has been drastic declines in Consumer Confidence Indexes, to levels not seen in decades. This is a particularly worrying development because of the tremendous importance of private consumption in macro-expenditure (generally more than 60% of GDP); if consumption suffers a significant decline, analysts argue, this is a telltale sign that the economy is on its way to recession. If the analysts are already concerned about the consumption situation, they consider it will get worse in 2009: recent forecasts of the negative change in consumer expenditure in the US point to 2009 being the worst year since Pearl Harbor in 1942.

How does Israel fit in to this picture? The Consumer Confidence Index (CCI) published by Hapoalim Bank, does show a decline from the high point of September 2007, which points to a reaction of Israeli consumers similar to that of consumers in other countries, but up to the present (November 2008), the reaction seems relatively limited. From September 2007 to November 2008, the Israeli CCI has fallen by "only" some 12.5% and has returned to its level in early 2006 - the November 2008 level of the index is not the lowest for decades but just the lowest for the last almost 3 years.

Can we learn from this that the situation is less bad in Israel than in other developed economies? Or perhaps, the slowdown in Israel is lagging the slowdown in other countries?

Can the CCI itself tell us anything about what is expected with consumption in 2009? A consumer confidence index is traditionally divided into 2 components, one relating to current consumption, the other - to expected consumption. If this second component declines more than the first component, this indicates an expected accelerated decline in consumption in the future. The current consumption component of the Israeli CCI declined by 7.4% from February 2008 to November 2008, while the expected consumption component dropped by a steeper 10%, pointing indeed to an accelerated decline in consumption during 2009.

Consumer confidence is not the only area where current developments look less severe in Israel than in other countries. The latest data on unemployment - for the 3rd quarter of 2008 - show no signs of increase in the unemployment rate, while in other countries - including/especially the US - the rate is already increasing significantly.

Of course, the two - unemployment and consumption - are connected. As consumption declines, so unemployment increases and the increase in unemployment will deepen the decline in consumption.

No-one in Israel doubts that unemployment will soon begin to increase (the October unemployment rate will be published on 17 December), possibly sharply. So we should not be overly "impressed" by the current limited decline in the Israeli Consumer Confidence Index: the decline in consumer confidence - and with it, the decline in consumption - is definitely expected to accelerate in 2009.

We will be checking this (as well as unemployment developments) very closely in the months ahead.

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