Industrialists Brace for Worst-case Scenario / If the Global Crisis Worsens, Israel Will Face 100,000 Layoffs

'Exports are already dropping,' says Ramzi Gabbay, chairman of the Export Institute. Low-tech industry has been hurt but high tech has been hit a lot harder, he says.

The serial debt crises shaking Europe and the sluggishness of the U.S. economy are already impacting Israel, through exports. But the Export Institute at the Industry, Trade and Labor Ministry is bracing for a much worse collision, which officials warn could lead to mass layoffs in Israel.

"Exports are already dropping," says Ramzi Gabbay, chairman of the Export Institute. Low-tech industry has been hurt but high tech has been hit a lot harder, he says.

Ramzi Gabbay - Ofer Vaknin  - 10112011
Ofer Vaknin

The Export Institute has consolidated two scenarios for Israel next year, since there is no consensus anywhere in the world as to how the crisis may pan out.

The optimistic scenario is that the crisis will continue and possibly worsen a little. The pessimistic one is that it will get a lot worse in the most vulnerable countries, spread to additional countries in Europe and ripple onto a third tier of countries that have not been directly affected yet but that export to the countries in trouble. Those third-tier countries will then suffer economic slowdowns themselves.

Under the optimistic scenario, Israeli exports will grow by a measly 3% in 2012, in dollar terms. Under the pessimistic one, exports will drop like a stone, as happened in 2001 and in 2008.

Every contraction of 1% in global economic growth depresses Israeli exports by the same degree, says the Export Institute. Each 1% drop causes lost revenue of $850 million and about 8,000 jobs, the institute sums up.

Figures from the past support that thesis. Following the crisis in late 2008, global trade contracted by 11.7% in 2009. Israeli exports excluding diamonds contracted by 14%, in dollar terms. Israeli economic growth slowed from 5.4% in 2008 to 0.8% in 2009. Unemployment grew from 5.7% in the second quarter of 2008 to 7.7% a year later.

Under the pessimistic scenario, if Israeli exports contract by 14% in 2012 (as happened in 2009 ), more than 100,000 jobs in Israel will be lost. On the bright side, that isn't likely unless the crisis indeed drags out, because of the heavy compensation cost employers would have to bear.

Gabbay's advice is to immediately reinstate a government fund to help companies penetrate new markets, since the traditional export destinations for Israel are in so much trouble. People at the Industry, Trade and Labor Ministry, Finance Ministry and Manufacturers Association of Israel are discussing this very thing. Another crutch to hurting exporters would be to lower the costs of credit insurance for companies exporting to high-risk markets - India, China and Brazil, but also smaller markets such as Vietnam, Mexico and South Korea, says Gabbay.

The sectors most exposed to markets in trouble are pharmaceuticals, jewelry, textiles, clothing, medical equipment, and rubber and plastics, says Shauli Katzenelson, chief economist at the Export Institute.

The export of goods, excluding diamonds, to the PIGS (Portugal, Italy, Greece and Spain ) dropped 1% in 2010, then another 4% between January and August 2011. Israeli exports to the United States contracted by 2% in 2010, and rebounded by 2% in January-August 2011. Export growth to Britain slowed from 59% in 2010 to 14% in January-August 2011. So while there is some growth, and not all is black, the question is what the future will bring. There is no consensus among economists about that.