More Israel Thoughts

As our marvelous six-week adventure is coming to an end in five days, I wanted to give you some more impressions I have of Israel. This trip has allowed us to live almost like Israelis do, as we are totally focused on family and not on tourism. Also to answer a few questions I've received off-line.

Israel is an unusual country in many ways. One is that it imports almost everything. Heavy industry outside the defense sector is relatively small. However, Israel is a hot bed of technical creativity and many products and technologies manufactured elsewhere are developed here. Check Start-Up Nation, an excellent book on Israeli entrepreneurism to see how Israeli businesses are able to develop and sell their technologies around the world.

As such, you would have thought that Israelis suffered seriously during the Great Recession. However, not so. GDP only declined in three quarters, the fourth quarter of 2008 and the first and fourth quarters of 2009 . On an annualized basis, GDP increased 7.9%,  4.2% and 7.7% for 2008, 2009 and 2010. Unemployment as well did not spike dramatically as it did in the US and Europe. It remained in the range of 6.5% to 8.0% throughout the period of the recession.  Nominally, inflation has also been low, 2.2% in 2010, well under control.

Like Brazil, Israel weathered the recession with only mild effects. Like Brazil, the credit in part goes to the strong hand the Central Bank, the Bank of Israel, along with its Governor, Prof. Stanley Fischer, has taken to regulate markets, interest rates and foreign exchange.

However, there are some worrying signs this year. Prices of key commodities such as gasoline have risen dramatically and are really biting into the income of Israelis. Gas costs about 7.20 shekels per liter at the pump. At current exchange rates (about 3.65 shekels = US$1), that amounts to US$1.972 per litre (not gallon). Compared to Brazil, it's a little less than double the cost of filling the tank. Ouch!  As Israel moves largely by road, everyone is talking about the price.

Likewise, food prices, including one of Israel's primary export crops, citrus fruits, are rising as well. Also gets at consumers where they really know pain.

Housing is a third area that worries Israelis. A number of people I've spoken with on this trip have been complaining that real estate prices are soaring well beyond the means of working and middle-class Israelis. Every street in Tel Aviv has projects underway, whether it is new construction or rebuilding. One building a friend pointed out to us has sea front apartments for the mere bagatelle of 25 million shekels. Ironically he pointed this out from the almost totally derelict half-acre site that functions as his painting studio. But, he admits, by next year, it will be under construction.

Whether this real estate boom constitutes a bubble is as yet difficult to say. I don't know how much housing finance is securitized, how firmly lending standards are enforced, etc. But, financing is generally easy to come by at very attractive rates. A relative showed me a term sheet for a loan for the purchase and reconstruction of his apartment that has an a.p.r. in 2011 of 3.3%. (Brazilians control yourselves, that's annual, not monthly).

Another fun interest rate comparison with Brazil. Bank overdrafts in November 2010 had an average rate of 9.8%. Yes, that's annual, not monthly.

These recent price rises have gotten politicians attention recently. Likud (ruling party) members of the Knesset are yelling at the Prime Minister that he must address people's concerns about prices quickly or they will lose the next election. He is not taking this too seriously. His response: I was a former Minister of Finance; I know what I'm doing. I think I've heard that before somewhere.

The reality is that relatively, Israel is enjoying a robust economy in relative terms. I'm sure the Spaniards and the Greeks would love to have Israel's level of problems.

Much more difficult is what to do about Egypt and Jordan, Israel's only two relatively friendly neighbors in the region. If the IDF suddenly has to pay attention again to its southern and eastern borders as well as Lebanon and Gaza, things could get more interesting here — and not in the good sense.