Southern California-Israel Chamber of Commerce Southern California-Israel Chamber of Commerce

The labor market begins to toe the line

Thu, 15 Jan 2009 00:00:00 -0800

Help-wanted advertisements: total and hi-tech, 2006-December 2008
(2002 = 100)

Wh ile the US economy has been reeling in recent months from labor market data huge monthly job losses, sharp increases in unemployment, the Israeli economy has not yet begun to show any significant effect of the economic slowdown on the labor market. The last data point for unemployment October 2008 shows the unemployment rate steady at 6% since May, but with no sign of any upturn. Given clear weakness in many indicators of economic activity, no-one in Israel believes that unemployment w ill not start increasing, but unt il the data show the increase, analysts can argue that the slowdown in Israel could well turn out less severe than in other economies around the world.

However, unemployment is only one indicator of labor market developments and not necessar ily the most important. Other labor market indicators are already showing signs of weakness. One is the number of help-wanted advertisements (shown in the graph): called in the professional jargon a marginal employment indicator, this variable often tends to lead other labor market indicators that is, it tends to change direction (showing a recession or a recovery) before other labor market or macro-economic indicators change direction.

The graph shows a sharp downturn in this indicator of the demand for labor in the final months of 2008, both in total help-wanted ads and in ads for hi-tech personnel. A breakdown of the total into economic sectors shows a sharp increase in the demand for labor in practically every economic sector at the end of 2008: the general nature of the decline in demand by economic sector is a further proof that the decline is a macro-economic development rather than one characterizing only certain sectors of the economy.

If unemployment data are st ill not showing any signs of increase, a partial indicator of unemployment certainly is: the number of job seekers at labor exchanges run by the government's Employment Service has been increasing stead ily since Apr il 2008 through November (the last figure ava ilable). In past periods of economic weakness, an increase in the number of job seekers has tended to begin prior to the increase in total unemployment, and this may well be the case in the current period of economic weakness.

Analysts st ill want to see data showing an increase in unemployment, before they fully believe that there are serious labor market implications as a result of the economic slowdown. They may well get a first chance to do so on 20 January, when unemployment data for November 2008 are due to be published, and again during February when the Labor Force Survey the most complete dataset on labor market developments for the 4^th quarter of 2008 w ill be published.

Once the data show that unemployment has begun to increase, the main question w ill switch to: how high w ill the unemployment rate go? At the moment, that is anybody's guess.

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What's with the Israeli consumer?

Sun, 21 Dec 2008 00:00:00 -0800

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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Foreign trade: exchange rate and slowdown effects

Wed, 03 Dec 2008 00:00:00 -0800

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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Is real estate booming in Israel?

Wed, 03 Dec 2008 00:00:00 -0800

Prices of owned apartments, by region, 2006 increase
(average percent change from 2005)

Source: Central Bureau of Statistics

As reported in The Marker, Israel's economic and financial daily, the New York recently published an article praising Israel's real estate market, describing it as "more attractive than the Hamptons". The article made special reference to the real estate market in Tel Aviv and Jerusalem, and indeed there is clear evidence of luxury apartment blocks being constructed in Tel Aviv, and of the purchase of luxury apartments mostly by foreigners in Jerusalem.

But the question is whether there is a boom in Israel's real estate market as a whole, or only in the luxury part of this market? The most up-to-date information on apartment prices clearly does not show an overall boom (see graph). Apartment prices did increase on average in 2006 by 5.5%, but price increases were concentrated in Jerusalem (12%) and Tel Aviv (5.3%), the two areas mentioned in the New York Times article, and also in the Sharon area (5.2%).

Not surprisingly, apartment prices in Haifa and the Northern region declined, in the wake of the July-August 2006 war, which principally affected that area of Israel, but in other area, not affected by the war (Gush Dan, Central, Southern), there were no significantly positive price developments.

This lack of overall recovery in real estate remains a dilemma, given the strong recovery of macro-economic activity over the past 3-4 years.

Even regarding the luxury market, analysts are asking about the economic sense behind all the luxury apartments being constructed at the present time in the Tel Aviv area. The luxury market is a limited market, and it is not clear that there will be sufficient demand to match the supply of these new luxury apartments.

Tracking the Israeli real estate market is likely to be extremely interesting for the foreseeable future.

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Construction continues to resist revival

Wed, 03 Dec 2008 00:00:00 -0800

Residential construction starts

('000 apartments, annualized, seasonally adjusted data)

Source: Central Bureau of Statistics

This is the fourth time we have written about construction and real estate developments during 2006. The reason: construction and real estate continue to behave differently from the rest of the economy while the economy continues to expand (for more than three years now), construction and real estate continue to resist revival.

Data on residential construction starts for the 3^rd quarter of 2006 (published on 5 December) show this clearly (see graphs): these starts sank to their lowest quarterly level since the long recession in construction began way back in 1996. Starts had jumped in the opening quarter of 2006, raising hopes that a belated revival had begun in construction, but 2^nd quarter data dashed these hopes, and the latest data just "hammer the nail further into the coffin".

Does the decline in starts in the 3^rd quarter have something to do with the war? Quite possibly starts declined in the northern part of the country (a breakdown of starts by region is only available on an annual basis), but what is significant in general about the war period is that it had a relatively limited effect on activity in most economic sectors (except, of course, for tourism). So why should construction be different?

It is not true that there have been absolutely no signs of revival particularly in real estate. Housing prices especially of luxury housing have gone up considerably in Jerusalem, mostly because of greatly increased foreign investment in the Jerusalem luxury market. Office rents have increased significantly in Tel Aviv, as a result of the overall economic recovery. But we cannot yet talk of a clear-cut revival in construction and real estate.

Interestingly enough, one of the star sectors in the continuing stock market boom in Israel during 2006 has been construction and real estate. At the end of 2005, some investment houses recommended buying stocks of construction and real estate companies, on the assumption that 2006 would see a revival in these areas. The stocks indeed boomed but the sectors did not.

Maybe this will happen in 2007. But then again, they have been saying that for a few years now.

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The amazing 2006 budget outcome

Wed, 03 Dec 2008 00:00:00 -0800

State budget deficit: actual v. target, 1998-2006
(% of GDP)

Source: Ministry of Finance

2006 has turned out a remarkable year, from the point of view of the economy. GDP growth remained high at 5% (compared to 5.2% in 2005), showing that the July-August war had little effect on economic performance. Israel's balance of payments registered its fourth annual surplus, with the surplus reaching an estimated $7.3 billion, almost double the 2005 surplus (the very fact of Israel having a balance of payments surplus is difficult to absorb).

And now, the budget situation: on 9 January, the Ministry of Finance published preliminary data showing that the 2006 budget deficit amounted to just 5.5 billion shekels, half of the 2005 deficit, and to be compared to a target deficit (built into the 2006 State Budget proposal) of 17.2 billion shekels. In GDP terms, the 2006 deficit was 0.88% of GDP (compared to a targeted 3%), the lowest since the growth year of 2000.

This budget outcome for 2006 is not really a surprise. Throughout the year, current data pointed to record tax revenues, resulting from the continuing economic growth. In fact, up to December 2006, the budget had accumulated a surplus: in December itself, there was a very large (seasonal) deficit, which turned the previous accumulated surplus into a deficit for the whole year.

But what about the expenditure side: should the war not have caused a vast increase in government expenditure, that should, in turn, have led to a much larger 2006 deficit than that reported? In fact, defense expenditure jumped in 2006, but the unexpected increase is included in the 2007 budget (governments can play budgetary games like this!), and it is for this reason that in early 2007, to compensate for the defense increase, the Government decided on an across-the-board 3-4% cut in the 2007 expenditure of all other government ministries.

But in the meantime, Israel can boast of a budget well under control. This is important in the eyes of the international business community that looks closely at Israel's ratio of national debt to GDP: the lower the budget deficit, the less the need for the government to increase its debt and therefore the lower the debt-to-GDP ratio. As a result of the limited budget deficit in 2006, together with continuing rapid growth, preliminary data show an unprecedented low level of the debt-to-GDP ratio in 2006.

We can therefore argue that the July-August war also had a limited effect on the government deficit at least for the time being.

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