Teva Crisis Denting Exports for Export-dependent Israel

But GDP growth should remain strong despite hit from drugmaker, economists say

Boxes of tablets, produced by Teva Pharmaceutical Industries Ltd., sit on a pharmacy counter in this arranged photograph in London, U.K., on Thursday, Dec. 29, 2016. The rapid pace of innovation among drugmakers may continue to be overshadowed by broader investment themes, such as the switch away from defensive stocks into more cyclical industries, during 2017, according to Bloomberg Intelligence. Photographer: Chris Ratcliffe/Bloomberg
Chris Ratcliffe/Bloomberg

Israel’s export-dependent economy is expected to take a hit from planned job cuts and plant closures at its largest company, Teva Pharmaceutical Industries, but overall growth should stay strong.

Teva, the world’s largest generic drugmaker, accounts for as much as 3% of Israeli economic output, according to economists. Teva, along with Israel Chemicals and Intel’s Israel plants, accounts for close to half of industrial exports.

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As such, Teva’s announcement that it planned to slash its global workforce by a quarter, or 14,000 jobs — 1,700 of those in Israel — has caused concern, especially since ICL and Intel’s exports have slipped in recent years.

“We intend to reduce our [Israeli] export and gross domestic product forecasts for next year,” said Bank Leumi chief economist Gil Bufman. “In terms of GDP, it will mark down forecasts in 2018 by 0.3 percentage point. But it won’t completely derail the economy.”

Israel’s economy is poised to grow around 3% this year and economists had expected a faster rate of at least 3.5% in 2018. But Bufman believes it will be between 3% and 3.5%.

Over the first 11 months of 2017, pharmaceutical exports — which are mostly Teva — rose to $6.8 billion from $6.3 billion in the same period in 2016, although monthly pharmaceutical exports slipped by 40% since peaking in August, government data showed.

Not only will Israel’s exports be reduced by plant closings, Teva also sells to the domestic market and there is a multiplier effect of smaller companies selling to Teva, economists noted.

Exports make up more than 30% of Israel’s economy, but industrial exports excluding diamonds — $44 billion in 2016 — have shrunk to around 16% of that.

Fast-growing services such as those in the high-tech sector, which provide more added value and are less dependent on currency effects, are 14% of Israeli exports.

Even before the mass layoffs were announced, financial woes at Teva worried policymakers at the Bank of Israel. Minutes of an August 29 rates decision showed that committee members discussed developments at Teva. “The developments won’t create a macroeconomic impact in the short term, but in the long term there will likely be some negative impact on exports and on GDP,” the minutes said.

One potential silver lining for Teva, economists said, is that most of its laid-off employees in Israel would ultimately find new jobs. Between September and November, the number of job vacancies jumped an annualized 13.8%, based on trend data issued by the Central Bureau of Statistics on Sunday.

With a jobless rate of 4.1% in the third quarter, Israel’s labor market is deemed at or close to full employment — but with excess demand for labor.

“The economy is poised nicely to absorb most of these workers that are laid off,” said Jonathan Katz, chief economist at Leader Capital Markets. “So the impact on the general growth picture should be minimal.”