The government steps up – but will it be enough?

The government, under great pressure to "do something" about the burgeoning economic crisis, announced its emergency program on 19 November to revitalize the economy, currently characterized by clear signs of slowdown. The program has 4 main parts:
Increased investment in infrastructure
Special help to the hi-tech sector
Financial assistance to small businesses
Increased vocational training

All of these are classic measures: infrastructure investment is a textbook solution for enhancing economic growth, the hi-tech sector – extremely important in the Israeli economy – is already suffering significantly from the slowdown, small businesses in general tend to be the early victims when growth slows, and increased vocational training may well be called for when unemployment is growing.

But will all this be enough and will it have the desired results? The Minister of Finance announced that the program will involve expenditure of some 22 billion shekels in 2009, a very impressive sum. But this is far from the complete truth: part of the program is already built into the 2009 State Budget (which has still not been approved), so the actual increase in expenditure that the program calls for in 2009 is only 4-5 billion shekels. Secondly, part of the designated expenditure – in the area of infrastructure investment, for example – will only be forthcoming after 2009.

Another question regarding the program is how soon its implementation will begin. A general election has been called for February 10, 2009 and based on experience, little policy making takes place in the run-up to an election, and then after the election, forming a coalition is usually a very lengthy process. So it may be 5-6 months before anything concrete can be done with the program. In an election spirit, some critics of the program are already arguing that the program is no more than pre-election "spin", designed to help the ruling Kadimah party improve its election chances. In any event, the program still has to be approved by the Knesset, and some political parties may take advantage of this as the elections approach and make demands on the budget in return for voting in favor of the program.

But the biggest question of all concerns the fact that the program includes no measures to deal with the problem of long-term savings, whose value has dropped steeply as a result of the crisis in the financial and capital markets in 2008 as a whole but particularly from September. The Histadrut – Israel's nation-wide trade union – has demanded a "security net" whose function would be to protect long-term savings. Now that the emergency program has been announced without the security net, the Histadrut is threatening to call a national strike. This may seem a strange thing to do when unemployment is increasing, but in the past, it is proved the most effective way to achieve the Histadrut's aims.

It is still early days for the new emergency program, and its being an emergency program may increase the chances of its implementation. But in the meantime, the negative indicators keep rolling in.

Unprecedented

The Bank of Israel surprised again – for the 2nd consecutive month – and lowered interest early in November (on 11 November, to be precise), prior to the official interest rate policy announcement this month, scheduled for 24 November. As with the early October reduction, this latest one was of the order of magnitude of 0.5% (following the early October reduction, interest was again lowered – by 0.25% - at the end of October). What makes this particular reduction special is that it brings central bank interest in Israel to the unprecedented low level of 3%.

Will the current level of interest remain unprecedented? Probably not – there are strong rumors that interest will continue to be reduced, an expectation not fundamentally different from expectations regarding interest rates in other developed economies. Most major central banks have lowered interest rates in October-November (with the star role given to the Bank of England, which lowered interest in early November by a gigantic 1.5%) and these reductions are expected to continue.

Governor Stanley Fischer of the Bank of Israel is clearly worried – as are other central bank governors within their own economies – about the possibility that the Israeli economy will slip into a recession, brought on by the developing global recession and the credit crunch, which is firming up in Israel as well.

Every new piece of data recently published in Israel points clearly to the developing slowdown: two indicators published by the Bank of Israel itself show this – the State-of-the-Economy index, an indicator of overall economic activity, which has been trending down now for the past 4 months (through September) and the central bank's Company Survey for the 3rd quarter of 2008, with companies in all sectors reporting a slowdown of activity in this quarter (contractions of activity were reported by companies in industry, commerce and construction) and providing even more pessimistic forecasts of activity for the 4th quarter of the year.

Consumer confidence is also beginning to reflect the current situation, with a sharp fall in October in Hapoalim Bank's Consumer Confidence Index.

Data expected later this month are GDP estimates for the 3rd quarter and the Labor Force Survey – the broadest dataset on labor market developments. Questions waiting to be answered here are: 1. Will GDP growth slow significantly in Q3 (annualized growth was still high at 4.2% in the 2nd quarter of 2008, though lower than the 5.6% growth of Q1/2008)?; 2. Will the unemployment rate show an increase: up to now (the latest data on unemployment are for August), there have been no signs of increase in unemployment, but at the same time, the economic press is full of reports of companies firing workers, particularly – but not only – in the hi-tech sector.

The answers to these questions will surely influence Governor Fischer as he prepares for his upcoming interest rate decision on 24 November, when a new precedent may indeed be set in

the area of interest rates in Israel.