“The government that is formed after the elections will enjoy the most favorable opening macro-economic conditions in recent years,” says Bank Hapoalim Chief Economic Advisor, former Bank of Israel Head of Research, and Tel Aviv University Professor of Economics Leo Leiderman. In an interview with “Globes,” Leiderman presents an optimistic forecast for the coming years and his recommendation to the government is to “mostly not mess it up,” and to focus on addressing urgent matters in the gas market, and in health and welfare.
What is your optimism about the economy based on?
“The Israeli economy is always full of surprises. The recovery from Operation Protective Edge was swift, and the engines continue to work, despite the geo-political risks, despite the situation in the global economy, and despite the uncertainty and the pessimism in certain sectors. On a fiscal level, the recovery is demonstrated by a few recent indicators, such as the increase in tax recipts last month.
"When we analyze the economic situation, we see that private consumption continues to grow at a rate of more than 3% annually, we see lively activity in mergers and acquisitions, and in exits, and in new ventures. The drop in energy prices has reduced the cost of production in the economy, reduced imports, and contributes to the growth of demand. The labor market figures are also positive, though there are some worrisome locations, such as southern Israel.
"In the housing market, the engines are restarting nicely, both on the part of the buyers, and on the part of developers and contractors. There is increased activity surrounding new government tenders, but also surrounding vacate-and-build projects, and Tama (national outline plan) 38 earthquake retrofit projects. Despite all this, in the near future, excess demand will continue to be an issue in the housing market, and there will be pressure on housing prices to continue to rise. A particularly outstanding area is investments in infrastructure, which contributes to the growth potential of the market. Among the projects that will stand out in the near future are the construction of another port in Haifa, investments in water and green energy, the extension of Route 6, and the like. As we know, the very low interest rates have a positive impact on all types of construction, including housing and infrastructure.”
Do you expect that the Bank of Israel will further reduce the interest rate?
“With the current state of the economy, there is no need to reduce the interest rate from its low level of 0.25%. On the contrary, the situation in the housing market and the bond market makes extreme caution necessary on this front. Though the projections for inflation in the coming two years are less than 1%, which is the lower limit of the inflation target range, this is a global phenomenon, the source of which is the global drop in energy and commodity prices, coupled in our case with increased competition in many areas, such as communications, supermarket chains, and others. For the consumer, the very low inflation is good news. Because of this, it’s doubtful that reducing the interest rate would be effective in raising inflation to the target range.”
In a lecture at the annual conference of Oren Mizrach Insurace Agency, a unit of The Phoenix Holdings Ltd. (TASE: PHOE1;PHOE5), which took place in Jerusalem, Leiderman focused on global economic developments, particularly the crisis in Greece, and the Russia-Ukraine conflict - the main risk areas for the global economy in the short term, in his opinion.
Europe is still Israel’s primary trade partner, a deterioration in the situation there won’t adversely affect exports?
“Export data already reflect the weakness stemming from the situation in Europe, and, in my opinion, a further deterioration is not to be expected. On the other hand, there is a fairly good probability of positive developments, if, for example, an agreement is reached on the crisis in Ukraine that makes it possible to lift the EU sanctions on Russia, or if a solution is found for the debt crisis in Greece.”
Leiderman believes that this time too, the crisis in Greece will end in an arrangement that will guarantee continued support of the country - because the economic, political, and social costs of a partial or complete breakdown of the euro bloc are much greater than the cost of finding a compromise and an arrangement to allow the euro bloc to continue. The rate of withdrawals from banks in Greece is threatening to create a banking crisis of tremendous proportions, which Leiderman believes will serve as a catalyst to finding a solution, even if only a temporary one.
What worrying indicators do you see in the economy?
“The picture is less rosy in terms of investments in new industrial plants, industrial buildings, machinery and equipment. There is no doubt that the situation of industry in Israel is troubling, we have already had a shortfall for two or three years, and this is one of the issues that the incoming government will need to deal with.”
What does the government need to do with the budget?
“In the current situation, it makes sense that the new government will make decisions about the second half of 2015 and 2016 together. Despite the fact that, in principle, I oppose two-year budgets, this time, it seems that it would be otiose and inefficient to hold two rounds of budget discussions in the current calendar year. The fiscal situation is relatively good, and there is no need to carry out significant cuts or to raise taxes in the immediate term. 2014 ended with a deficit of 2.8% of GDP, and, as previously mentioned, the year started with relatively good fiscal performance. The first goal of the incoming government should be not to damage, or ruin, the positive trends, and to maintain fiscal discipline and financial stability."
Does the government have nothing to do other than not to spoil things?
“There is no doubt that there are many fields in which quick and credible decision making is required. For example, anything having to do with producing natural gas from the Tamar, Leviathan, and other reservoirs. Also in health, welfare, and social matters, there are critical issues that must be addressed as soon as possible, without delay. It is no secret that a sort of pessimism has developed in the private sector about the future of market recently, because of greater regulatory and bureaucratic difficulties, and the great uncertainty over the ‘rules of the game’ in the market. The pessimism is liable to lead to a significant number of investors left in holding patterns, and others preferring to invest their marginal shekel abroad and not in Israel. It is important to emphasize that sustainable growth in Israel must be led by the private sector, and in order for this to happen, it’s necessary to regain the private sector’s confidence in the economy. Which brings us back to the need for a decisive and credible socio-economic program.”
Published by Globes [online], Israel business news - www.globes-online.com - on February 15, 2015
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