Real estate: a) The global real estate bubble is gradually deflating, slowly (in Europe) or rapidly (in the U.S.). Housing prices had skyrocketed by double-digit percent during the last few years thanks to merry and carefree borrowing. Now they're stagnating or in retreat, in some places. As borrowers default and banks seize property, the supply of housing is growing and the collapse of America's residential real estate market triggers a worldwide financial crisis.
b) Here in Israel, the real estate market has bounded after years of recession. The market is growing fast and apartments are scarce in prime areas. Prices are soaring, cranes abound on city skylines as high-rises loom skywards. Supply is low.
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Credit: a) The global credit crunch has become so bad that central banks were forced to intervene and infuse billions upon billions. Interbank interest rates in the U.S. and Europe has climbed to new heights. Unable to borrow at sensible interest rates, leveraged buyout funds are all but paralyzed.
b) Corporate Israel borrowed left and right, though as signs of resurgent inflation start to appear local lending rates are on the rise.
The labor market: a) Within one month, U.S. unemployment rates rose from 4.7% to 5%, a two-year high. The November labor report shows that the Fear Index (VIX) is ruling not only Wall Street but employers too. The finance sector is wielding the ax with a heavy hand.
Stock exchanges: a) The S&P-500 index tumbled 5% in the last quarter of 2007 and continued its dive on Friday. European share prices also drooped.
b. Meanwhile, over here, the TA-25 index gained 8.3% in the fourth quarter of 2007 and is all but touching its all-time high. The same is true in many other emerging markets.
That was then, and what of now?
So far, so good. Now for a question that only fools would touch. What next?
Will Israel follow in the path of China and certain other emerging markets that disengaged from the American growth driver and are now forging ahead on their own steam? Will these economies keep their heads above water if America stumbles into full-blown recession? Is Israel dissociated from the global business cycle?
Good questions. And the answer to all scenarios lies in a single fundamental aspect that impacts the global economy in so many ways: liquidity.
Liquidity ran high and the global economy boomed at the start of the millennium, thanks to falling short-term and long-term interest rates. This liquidity resulted in roaring economic activity, which led the smart money to build sustainable businesses, for which the low interest rates were scaffolding on which the house was erected, so to speak. Once construction is done, the scaffolding can come off.
But the low level of interest rates led to economic phenomena that can't exist without cheap money, at first in the margins and later in the mainstream as well. Such as, leveraged buyouts, and unrestrained consumption - which brings to mind wild vicious-circle dealing of the kind that sent Enron executives to prison. Mortgage the house, use that money to repay wildly mushrooming credit bills, take out a second mortgage and so on.
And here? At the end of the day, the situation in Israel will depend on the real factor behind the local prosperity. Is the local real estate sector flourishing because of foreign investors who bought wildly thanks to the low interest rates and high liquidity in their home countries? Or will the local property market follow the American and European markets?
Of course, we can always hope that fiscal responsibility, structural reforms, government encouragement of productivity and creativity will drive Israel's economy forward as the rest of the world reels.
But if the factor that fueled Israel's labor market, stock exchange and credit market was global economic prosperity, then sooner or later we're in trouble.
Haaretz.com, the online edition of Haaretz Newspaper in Israel, offers real-time breaking news, opinions and analysis from Israel and the Middle East. Haaretz.com provides extensive and in-depth coverage of Israel, the Jewish World and the Middle East, including defense, diplomacy, the Arab-Israeli conflict, the peace process, Israeli politics, Jerusalem affairs, international relations, Iran, Iraq, Syria, Lebanon, the Palestinian Authority, the West Bank and the Gaza Strip, the Israeli business world and Jewish life in Israel and the Diaspora.
