Is 2009 a lost year?

It was really only a matter of time before the developing recession in Israel showed up in the ultimate macro-economic data – GDP and unemployment: in most other developed economies, data have already been published showing negative GDP growth and increasing unemployment, with dire forecasts for 2009. But no such evidence was available in Israel – until 4th quarter 2008 data for GDP and unemployment were published in the last week of February. What light do these data shed on the Israeli economy during 2009?

Here are the dry facts: GDP declined by an annualized 0.5% in the final quarter of 2008, while 3rd quarter growth was revised down to 0.9%, compared to an earlier estimate of 2.3%. Growth in the complete 2nd half of 2008 was reduced to 1.1%, compared to 4.8% in the 1st half of the year. The 4th quarter decline in GDP is the first since 2002, when the Israeli economy was in recession.

Results for business sector product, more sensitive to cyclical movements in the economy than GDP, were even worse: negative growth of 1.2% in Q4/08, with the 3rd quarter increase revised down to just 0.5% (an earlier estimate for this quarter was a 1.9% increase). Business sector product growth has now been lower than GDP growth for two consecutive quarters, a clear indication of a brewing recession.

Now unemployment: the unemployment rate increased to 6.3% in Q4/08 (based on the Labor Force Survey for that quarter, the most comprehensive labor market dataset in Israel) from 6% in the previous quarter: this is the first meaningful quarterly increase in unemployment since 2003, when the economy was still in recession (up to mid-year).

This initial increase in unemployment was not paralleled by a decrease in total employment (even though marginal employment indicators are already showing a decline in the demand for labor), but there were nevertheless significant declines in unemployment in Q4/08 in commerce, industry and business services.

In addition, there was a sharp decline in full-time employment and a parallel steep increase in part-time employment: this is classic textbook labor market behavior in the initial stages of a recession, with employers cutting costs by transferring workers from full-time to part-time employment. The Israeli economic press has been full recently of reports about companies – particularly in the high-tech sector – moving over to a 4-day week.

What does all this tell us about the prospects for 2009? The Bank of Israel, prior to the publication of these new data, had already forecast a 0.2% decline in 2009 GDP. However, soon after that, the Economist in London published its own forecast for Israel – a 0.9% increase in 2009 GDP. After the 0.5% decline in 4th quarter GDP was published, expectations were voiced that in the opening quarter of 2009 the decline of GDP could accelerate to 4%.

The truth is that no-one really knows the answers to the two most important economic questions at present: a) when will the recovery begin; b) how fast will it be once it begins. Regarding the US economy, we have heard answers to the first question ranging from Ben Bernanke, Chairman of the US Federal Reserve – that the recovery could start by the end of 2009, to Warren Buffett, who recently claimed (after his holding company Berkshire-Hathaway suffered a 96% drop in profits in Q4/08) that the recovery might not even start before 2011. Another still unanswered question is whether stock exchanges around the world have reached their low points, and whether it is now worthwhile purchasing shares. Everyone agrees that if and when the recovery begins (both in real economies and in capital markets), it will be exceedingly slow.

The chances are therefore that 2009 will be a lost year for economies around the world – for Israel as well: low or negative growth, contracting world trade, burgeoning budget deficits are only a few of the characteristics of a lost economic year. Everyone also agrees that the current crisis has brought/will bring about fundamental changes in the "rules of the economic/financial game" that determine behavior in the global economy. It seems now that the speed of the recovery, once it begins, will depend very much on the extent to which the new rules are accepted and adhered to.