Despite the strike, the Central Bureau of Statistics produced an optimistic headline yesterday - 2.5 percent growth in the first quarter of the year. Is the economy finally shifting from recession to growth?
As in many aspects of life, the answer is complex. The data indicate two growth engines - exports and public spending. The first is good and not surprising, because whenever recession hits and domestic demand falls, manufacturers have no choice but to export. Also, the wage cuts in the business sector and the weakness of the shekel against the dollar - a trend that only recently reversed - have made exports more profitable, boosting it 5.5 percent (annual) for the quarter.
The second engine, however, is very bad - government spending. Before the end of 2002, the government made all kinds of somersaults to keep the deficit from exceeding 4 percent of GDP, including deferring payments. But as the new year began, the treasury had to pay up the billions it owed. Moreover, the public payroll had grown before the elections, adding to the bogus growth, measured according to the government's spending on wages and procurement.
This is the easiest way to obtain "growth" - up wages, hire more workers, spend more money, and there you go. But this stifles the private sector. It does not improve our standard of living - it lowers it, because the public sector becomes even more inefficient. As it is, the public sector already accounts for 55 percent of the GDP, the highest in the West.
We are therefore left only with the increase in exports and with the good news on the capital markets - gains on the stock market, drop in the interest rate, projections of low inflation and the strengthening of the currency.
The capital market is optimistic, but all depends now on the full approval and implementation of the economic plan. Because in order to go on cutting nominal interest, long-term interest has to continue to drop; this can only happen if the budget deficit goes down, which can only take place if the cuts stipulated in the economic plan are implemented.
Otherwise, the deficit will go back up to the dangerous level of 5-6 percent of GDP, Israel's credit rating will be at risk, and the treasury will have to raise many more billions from the public with treasury bills - which will push interest back up, push the shekel down and plunge stock prices.
The CBS's announcement is not all rosy. Of 14 economic indicators, 11 are negative, like investment in fixed assets and import of goods and services. Namely, we have not emerged from the recession yet. Granted, we are stabilizing, and the rise in exports is positive - but things are still uncertain. To get onto a fast, stable recovery track, the economy still has to undergo two revolutions - one small, one big.
The small one is to end the strike with an agreement and to implement the recovery plan. The big one is to start negotiations with the Palestinians and stop hostilities on both sides. Because no one really expects tourists to come back and investors to stand in line when the people keep getting killed.
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