Opinion

Is Israel Reaching the End of 15 Good Years?

There are some good reasons to think we’re due for a recession, but if we’re not, you can thank Israeli brainpower for keeping the economy aloft

An employee works at a laptop computer at the Jerusalem Venture Partners JVP Media Labs, situated in the JVP Media Quarter in Jerusalem, Israel, on Wednesday, Oct. 21 , 2015.
Bloomberg

It’s not hard to imagine one day in the next year or so an Israeli mother calling her young daughter over for a private talk. “You may soon be feeling things you’ve never felt before and I think it’s time to explain what’s going to happen,” the conversation would start.

Her daughter looks puzzled, as her mother would expect. Her own mother had given her the same talk 30 years ago, but it wasn’t necessary really – she had learned it all on the street long before. “There are a lot of rumors around my office the company is losing money and that they are going to have to lay off employees. I’m worried that I could be one of them. We’ll have to cut back – no new Galaxy phone next year, I’m afraid. We won’t be able to take that European vacation either.”

“Laid off? What’s that?” The daughter asks suspiciously.

“It’s when a business fires employees, not because they’re doing a bad job but because the company isn’t making enough money to pay them. That’s what happens in a recession.”

“They can do that? I’ve never heard of such a thing. A recession?”

“Well let me explain,” as her mother takes her daughter’s hand and the conversation continues.

A scenario like that is hard to imagine in the United States or Europe, which less than a decade ago suffered the worst economic downturn since the Great Depression. Even today, large parts of Europe still have double-digit unemployment and the average for the European Union is close to 10%.

But anyone under the age of 25 in Israel has never experienced widespread joblessness, much less a recession. Our last one ended in 2002 and while the rest of the world was reeling from the sub-prime mortgage crisis after 2008, Israel barely felt a thing. Today the jobless rate is 4.5% and more people are in the job market than any time before. If Israel has a labor problem, it is that we’ve reached full employment and in some sectors there are even labor shortages.

Reasons to worry

There are three reasons to worry that the long stretch of uninterrupted economic growth is coming to an end.

One is that the shekel is trading at close to a three-year high against the dollar and has gained 9% this year alone, which has to be hurting Israel’s export industries by squeezing profits and maybe even causing losses. Last week two companies – a sugar maker and the Israeli unit of a U.S. company – both said they were closing up shop and laying off close to 500 workers. The Manufacturers Association warned that this is the start of mass layoffs.

The second is that the consumer boom which has sustained economic growth in recent years is starting to look shaky. Low unemployment and rising wages have been supporting the national shopping spree but so, unfortunately, has been a lot of bank borrowing. Encouraged by record low interest rates, household borrowing has increased 23% over the last three years, according to the Bank of Israel. That can’t go on indefinitely.

In short, the two pillars of economic growth are looking unsteady. But there is a third reason, which is that economies don’t just keep growing forever. Australia has recently set a new record of more than 25 years of uninterrupted growth, but the exception proves the rule. In the U.S., the average economic cycle is six years.

So, should you be sitting your teenager down this Shabbat to tell them some facts of life they may not be familiar with?

Reasons to stop worrying

You’ll be relieved to hear that you can probably wait. The consumer boom is probably nearing the end of the road. In fact, we should hope it is because high levels of household debt, inflated by record levels of new mortgages and soaring home prices, is putting the economy in a dangerous position. If recession does strike, it would be a messy affair of rising unemployment, falling home prices and rising defaults by people carrying costly mortgages and other loans.

Yet if a scenario like that isn’t in the offing, it’s because of Israeli brainpower. When it comes to manufacturing, the strong shekel is a killer because at the end of the day your product is more likely to be competitive because it is cheaper – and a strong shekel makes it harder to keep the price down. But when you move up the high-tech scale, innovation and added value grow more important and price less so.

In Israel’s case, most innovative capacity goes into research and development and providing services, which explains why service exports have kept growing even as the shekel has grown mightier. Multinational high-tech companies aren’t going to close their 200-odd R&D centers in Israel, whose exports are ideas, not things, because they cost too much.

If you need an example, look at the biggest of the two companies that announced layoffs last week. Visonic, a unit of America’s Johnson Controls, manufactures alarm systems, and those 400 or so jobs in Kiryat Gat are going to be moved to China as you might expect. But the company also employs 125 people in Tel Aviv in R&D, and the company says those jobs are staying put.

There’s only one problem with this happy story: The job losses are going to affect Israelis with the least skills and education, who can’t move over to a job as a software developer for a startup or a big foreign company. The strong shekel may not lead to a recession but it will strike another blow against income equality.