Analysis

Israel’s Political Waiting Game Exacting a Growing Price From Its Economy

The economy is showing signs of a slowdown at a time when there’s no effective government to address it

Israel's Prime Minister Benjamin Netanyahu attends a news conference in his office in Jerusalem on April 23, 2009.
AFP

The markets are showing stunning indifference to the coalition stalemate. The economy is showing signs of a slowdown at a time when there is no effective government to deal with it

Screaming headlines and battling politicians aside, there is a surprising degree of insouciance in Israel about the political deadlock that has led to two general elections this year and is almost certainly going to lead to a third one by March. Life goes on as normal, consumers are spending and vacationing, wars are fought and, most surprising of all, it’s been business as usual for the financial markets.

Benny Gantz’s failure to form a government means we face a third poll in less than a year, and it could easily end in the same stalemate as the first two. Israel’s 11 months without an elected government could now stretch into 18.

But nothing seems to worry investors, not even when a stunning reminder like Gantz’s failure to form either a national unity government or a center-left minority coalition is fresh on their minds. On Wednesday, as Gantz announced he was giving back the mandate, the shekel weakened against the dollar, but that was after a two-week run that brought it to its strongest level since early in 2018. It was hardly a vote of concern about the political deadlock. On the Tel Aviv Stock Exchange, trading was mixed, influenced more by corporate earnings than by the Gantz-Netanyahu-Lieberman saga.

On a superficial level, the markets’ indifference is entirely understandable. Netanyahu’s caretaker government has been attending to business on a day-to-day basis with no problems; it’s not like the periodic shutdowns of the U.S. government that bring the public sector to a standstill. The government not only continues to collect taxes, pay its bills and keep schools and hospitals open, it even fought a brief war with the Gaza Strip last week and continues playing the Great Game with Iran in Syria.

Even the economy seemingly behaves as if the political drama is nothing more than a sideshow that will end happily, perhaps later rather than sooner, but happily in either case. Last week, the Central Bureau of Statistics reported that gross domestic product grew at a brisk 4.1% rate in the third quarter. The economy continues to operate at full capacity, consumers continue to spend and to travel abroad in record numbers.

Unfortunately, it’s not so simple. One important thing that Prime Minister Benjamin Netanyahu’s caretaker government cannot do is rein in government spending or raise taxes, which means the budget deficit is growing quickly and uncontrollably. In October it was 3.7% of GDP, far above the 2.9% target.

The next government was supposed to address this problem in the 2020 budget, which by law must be approved by the Knesset by March. But unless there’s a miracle and a coalition is formed without another election, the next government won’t take office until well after March. That means the red ink will keep flowing far into 2020. When there finally is a government, the austerity measures it will have to take will be more painful due to the long delay. Worse still, those budget cuts and tax hikes may have to be taken amid an economic downturn, the exact opposite of the fiscal expansion it should be undertaking under the circumstances.

On the surface, a growth rate of 4.1% doesn’t seem to point to an imminent slowdown, but a look beneath the topline numbers shows the economy is exhibiting serious weaknesses. For one, the breakneck pace of growth was generated by a surge in car imports and by companies producing goods that went into inventory rather than being sold. If you discount these two items, economic growth in the third quarter was actually negative.

Meanwhile, the consumer spending that has been driving the economy for so long is starting to moderate. The other big drivers were in decline in the third quarter — exports (without diamonds and startup companies) fell sharply after four straight quarters of growth, and investment in machinery and equipment marked a second quarter of contraction. Factor in the iffy state of the world economy going forward, and the outlook for Israel next year doesn’t look so solid. It’s not a good time to be between governments.

If there’s any light at the end of the tunnel, it’s that Israel’s stalemate is more personal than it is structural. These days, when democracies in Europe and the United States are struggling in the face of intensely partisan politics and deep distrust of institutions, Israeli insouciance is not just a function of naivete but reflects a surprising confidence in the capacity of the country’s political echelons to run the country even as they bicker.

More than that, there is a broad consensus in the political center on the key issues that Israel faces — the Palestinians, Iran, the economy, even religion and state. That’s why no one is astonished at the prospect of Likud and Kahol Lavan sitting comfortably together in a coalition, which they would be doing, if not for Netanyahu and his legal entanglements.

And that’s where personality has become, unfortunately, the deciding factor. In so many words, Bibi won’t go gracefully, so everything has ground to a halt. Now we can only hope that he will go — willingly or not — before it’s too late.