Israelis Wary of the Gloomy Economy, but Shop Until Their Bank Balance Drops

Behavioral economist Dan Ariely says Israelis don't feel it's proper to spend money on something permanent, so they splurge on leisure activities.

Rishon Letzion's Zahav shopping mall was packed to the gills last week during the afternoon hours. Cars full of families with children were forced to circle some 45 minutes to find an empty parking spot, but wouldn't give up.

Anyone happening by would surely have thought some special children's event was taking place – perhaps a star-laden performance – but it was nothing but the summer vacation bringing in the crowds to cool off in the air conditioning, eat out and enjoy the end-of-season sales. The long lines weren't only in the parking lot: At fast food counters, children and their parents had to face lengthy waits until being served by the overburdened staff.

As every year, summer vacation involves heavy spending on leisure activities. The beginning of August marks the second half of the vacation season when summer camps and other extended programs for children have run their course, and many parents need to find creative ways to entertain the kids.

The simplest solution is shopping centers, where several hours can be spent on play areas, penny arcades, children's entertainment, food courts and, of course, shopping. Other places offer water parks, cineplexes and special summer exhibits arriving in Israel.

But you can’t always judge a mall by its crowds. Credit card companies are reporting growth of just 6.5% in purchases this July, compared with a year ago, when turnover was 10% greater than the previous year. But the slowdown doesn't seem to apply to entertainment and recreation, where spending has increased from 9% to 17%, the latter reflecting growth in spending on museums and hotels. Money spent at restaurants, coffee shops and fast food increased by 13%, 9% and 14%, respectively.

Meanwhile business at eateries over the last two weeks of July has taken off. Coffee shop chains reported a steady stream of customers and 20% growth in sales while sales at fast food chains soared 25% to 30%.

Where’s the slowdown?

This summer, Israelis don't show any hesitation in opening their wallets when it comes to attractions. Entry passes are estimated to have gone up by 5% to 8%, but the number of visitors has also risen. And spending doesn’t stop at the borders either. According to the Israel Airports Authority, just over 1.5 million travelers passed through Ben-Gurion International Airport in July – 6.6% more than the year before.

All this might seem rather surprising considering that many families report difficulty making ends meet. According to a survey by market research firm AC Neilsen, Israelis are increasingly worried about job security and the gloomy economy, with 65% of participants believing the national economy is in recession and only 8% thinking the recession will end by next year.

The survey shows 19% of Israelis polled are worried mainly about lack of job security, compared with an average 17% among Europeans and 14% throughout the world. It also indicates that 62% of Israelis are going out less than they did last year and that around 60% are spending less on clothing.

"I assume that there is currently a slowdown in large expenditures on new cars or home renovations, and is compensated for through spending on leisure activities," according to Dan Ariely, a lecturer in psychology and behavioral economics at Duke University. He adds that during the summer months, consumers are willing to spend more because of vacations. They can close the wallet later, when the school years starts, they reason.

"It doesn't seem proper to spend money on something permanent," says Ariely. "For example, when you buy a new car you pay in installments and this is a long-term obligation, while the summer is something temporary. The same can be said about the holidays."

Uriel Lederberg, CEO of the Paamonim organization that helps families organize themselves financially, isn't optimistic about the way consumer behavior has been developing lately. "On the one hand it seems the Israeli reality is shopping and entertainment, but on the other hand there is the troubling truth that the economic situation isn't encouraging. Both sides are correct and therefore problematic. These figures are like the first flow of lava before the eruption," he warns.

"To fulfill the desire to go out and go shopping, more people are borrowing more money from more places, beginning with bank loans, credit cards and finance companies, to employer loans and extended payments to credit companies, which are, for all purposes, loans," Lederberg continues.

He compares the situation to the sinking of the Titanic, where everyone was enjoying the ball and nobody worried about the approaching collision with the iceberg. "We could reach a situation where households go under, and we see this with the level of debt that is being taken on by people," he says.

"Our attention is focused on the broad population of the lower middle class, near the midpoint, that bring home perhaps NIS 15,000 [a month]. They are the core of consumerism and its driving force - and they're in a bind," explains Lederberg. "But the big problem is that they don't feel it."

After the holidays

Lederberg says the number of families turning to the organization is on the rise, but he doesn't rule out that this might be due to growing awareness. The situation will get more severe in October, he believes, once everything settles down after the summer and September holidays. Meanwhile, many families permit themselves to spend money they don't have.

"It's not only that prices have increased but that the [consumption] standard has moved higher," explains Lederberg. "The standard of living has risen and the middle class has eroded so the money isn't really there. Today's standard is a trip to Italy and two cars at home. If the money is there, that's great, but if it requires taking advantage of savings and foreclosing the future then it's a problem. I'm not worried about the banks: They'll get their money. The families, however, will feel it sharply. The cost of living isn't just in buying a home and not just the big-ticket items: It’s also ongoing [consumer] behavior."

Lederberg doesn't abide claims made by many families that "everyone's doing it" or "everyone has it," and says the truth is that the same "everyone" are driving cars that aren't theirs, living in houses that don't belong to them, and eating food that they didn’t buy with their own earnings.

A senior banking official says she expects household leveraging to soar in the next few years. Israel's rate of household debt is currently low by international standards, but adoption of the Basel III guidelines will motivate banks to divert credit from large borrowers to small businesses and households, and some have already begun doing this over the past year. She believes the public will quickly become accustomed to taking loans and exploiting cheap, readily available credit to boost consumer spending.

Moti Milrod
Country club swimming pool.
AP