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Nasdaq and Nablus Return to Haunt the Israeli Economy Again

In many ways, the perfect storm that drove Israel into its worst recession 20 years ago seems to be repeating itself, but there are differences

David Rosenberg
David Rosenberg
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Traders work on the floor at the New York Stock Exchange in New York, in May.
Traders work on the floor at the New York Stock Exchange in New York, in May. Credit: Seth Wenig/AP
David Rosenberg
David Rosenberg

It was the perfect storm. First the dot-com bubble burst in the spring of 2000, laying low Israel’s high-tech sector. Then, in September, the second intifada exploded, decimating the tourism industry and eventually causing a huge drop in consumer demand. By 2001, a worldwide recession was underway, weighing down on Israel’s exports. In 2001 and 2002, Israel endured its worst recession ever prior to COVID.

Two decades later, another perfect array of eerily similar storm clouds seems to be gathering on our horizon.

The blackest of those is blowing in from Wall Street, where tech stocks have been taking a beating. The tech-heavy Nasdaq 100 is down by more than a quarter so far this year and many of the industry’s stars, like Amazon and Facebook (Meta), have fallen even more sharply. The number of initial public offerings has plummeted.

Analysts are debating whether we are witnessing an ordinary correction to what most agree were excessive valuations for technology shares, or the early days of Tech Bubble 2.0 going bust before our eyes. If it’s the latter, we’d better watch out because in the past Wall Street’s problems have quickly become Startup Nation’s problems.

The reason is simple: Israel is a startup factory – we are constantly creating new, innovative companies that eventually either go public on the stock market or are acquired by a bigger, older company. The key to making this work is high and growing valuations for startups in order to entice early-stage investors to put money into them. If valuations don’t rise – or worse yet, fall – investment capital will evaporate.

Israel Venture Capital Research, which tracks the local high-tech industry, has found that over the years the lag between a declining Nasdaq and falling investment in Israeli startups is about 1-2 months. So far, that correlation hasn’t yet manifested itself. Five months into the tech downturn on Wall Street, no clear trend has emerged: After a few down months at the end of 2021 and early 2022, startup investment in Israel actually rose in March. But it’s still early days.

What about a third Intifada? There has been talk about a third one ever since the second one came to an end, but it hasn’t happened. Even today the West Bank remains relatively quiet, despite a wave of lone-wolf terror attacks and the best efforts of Hamas and others to foment mass violence this spring.

But who knows if that will remain so. The Temple Mount remains a focus of Palestinian anxiety, the Palestinian Authority is weak and ineffective, and ordinary Palestinians are struggling economically. Memories of the devastation wrought by the second intifada are gradually fading, certainly among younger Palestinians. At the very least, the situation is more combustible than usual.

Twenty years ago, there was debate about which had played the greater role in pushing Israel into a recession: Was It Nablus (the intifada) or Nasdaq (the tech slump)? But there was also a third factor, which was the global recession and decline of world trade, which affected Israel as well.

Here again, the clouds are gathering. If 20 years ago it was the dot.com burst and 9/11, this time it’s another bubble, the war in Ukraine and maybe resurgent COVID. The outlook for world trade is growing dimmer.

So far Israeli exports are holding up, but it’s been less than three months since the Russian invasion struck its blow to world trade.

That old 1999 talk

On the whole, it looks pretty bad, but history never quite repeats itself. Whatever George Sanatanaya said about “‘Those who do not learn history are doomed to repeat it” the fact is that the other trite saying that “this time things are different” also holds true.

In regard to high-tech, things are arguably different. Today’s frothy stock market is worryingly similar to the one in 1999, but tech itself is a different creature. As UBS CEO Ralph Hamers told CNBC this week: “It is not like 20 years ago. We had some models that were just models on paper and not real. The last 20 years, we have been able to show that there are real changes happening in retail businesses, in financial businesses etc., and that trend is not going to stop because of what we see currently.”

I would go even further: It’s not just that tech companies represent real businesses with huge sales and fat profits. High-technology has become so thoroughly intertwined with other sectors of the economy – everything from automobiles to retail to insurance – that it is no longer correct to speak of it as an industry. There may yet be a global economic slump ahead, but a tech bubble that bursts due to its own fragility? That’s 1999 talk.

The intifada threat likewise isn’t the same as in 2000. For better or for worse, Israel has West Bank Palestinians thoroughly monitored and controlled and, for all its holes, the security barrier will make it much harder for violence to cross the Green Line into Israeli cities as it did in the Second Intifada.

The Israeli economy, which since the Second Intifada has gone through no less than five wars, has developed good defense mechanisms to cope with conflict. Since the Second Lebanon War in 2006, there hasn’t been a conflict-related downturn of any kind, and even after that war, the recovery was rapid and powerful. A Third Intifada could stretch out longer than any of these other conflicts, but the ability of the Palestinians to strike directly at the Israeli economy is lesser than it was in 2000.

The threat of global recession remains the biggest challenge. The war in Ukraine, continued supply chain disruptions, rising inflation and interest rates, and China’s lockdown all conspire against global economic growth. No one of them look like they’re going away any time soon.

Israel, of course, can’t stand aloof from these processes, but we are in a relatively strong position – despite the government’s COVID spending binge, fiscal policy is in good shape, and Israel’s tech-oriented economy is better positioned to weather a downturn than others. A storm may be heading our way, but a perfect one seems unlikely.

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