Israel’s economy set fair in spite of gathering storm clouds

The Israeli economy has begun the year in rude health. After a wobbly start to 2016, solid export numbers and higher consumer spending pushed annual growth to 4 per cent, well ahead of central bank projections.

The country of 8 million hosts one of the world’s most vibrant high-tech industries, which has spread out beyond the “Silicon Wadi” that tracks the Mediterranean coastline north of Tel Aviv. It also enjoys a stable currency, has been a net lender for more than a decade and, thanks to the discovery of offshore gas, can even look forward to energy independence in years to come.

But how long can this rosy picture continue? The Middle East political situation is in turmoil, domestic politics looks uncertain too, the Palestinian peace process is non-existent and the sanctions movement seems to be growing. There is certainly a lively debate about the country’s economic prospects gathering momentum.

Kristin Lindow, lead analyst for Israel at Moody’s Investors Service, said recently that doubts over the future of Prime Minister Benjamin Netanyahu and that of his coalition raised a question mark over future economic policy. The prime minister, presently serving his fourth term and facing no serious political challengers, is undergoing two criminal fraud investigations involving alleged abuse of power. He has denied any wrongdoing.

Listening to Netanyahu, you’d think nothing was amiss. “We are on a very clear growth trend,” he told his cabinet in mid-February. “When looking at the OECD [Organisation for Economic Cooperation and Development] countries, we are towards the top of the list, almost at the head, and this is very important. This creates jobs, raises wages and is good for the citizens of Israel.”

But Lindow said that the prospect of a different prime minister and a shift in the balance of power in the ruling coalition was a potential concern. “It’s just a big question mark we hadn’t had in a while.”

Moody’s reaffirmed its long-standing A1 rating for Israel in January, explaining its decision not to award an upgrade at least in part on political uncertainty. Meanwhile the International Monetary Fund praised Israel’s economic performance in a February report, although it expressed concern about rising house prices and lack of vigour in containing deficits.

Domestic politics aside, there are also more longstanding political risks hovering over the economy. But Israel has actually been strengthened rather than weakened by the recent turmoil in the Arab world. Mutual self-interest has brought it closer to more conservative and more stable Arab states.

At the recent Munich Security Conference, ministers from both Israel and Saudi Arabia demanded greater pressure on Iran over its support for the Syrian government and for separatists in Yemen. Israel’s defence minister, Avigdor Lieberman, called for a dialogue with Sunni Arab countries to defeat radical elements in the region.

Despite this regional rapprochement, the US’s perceived retreat from the Middle East during Barack Obama’s presidency is a concern, as is Russia’s decision to fill the void. Then there is the peace process – or rather lack of one. With negotiations between Israel and the Palestinians frozen during Netanyahu’s premiership, his hardline policies and support for settlement expansion alienated opinion in Europe and in the Obama White House.

That has boosted the Boycott, Divestment, Sanctions (BDS) movement, a group that works to end what it describes as Israel’s oppression of Palestinians. Israel expends perhaps excessive diplomatic capital in countering BDS. It plans a “Fight BDS” rally at the United Nations in New York in March.

Economists note, however, that the BDS agenda is largely focused on cultural and academic contacts and has little impact on the real economy. “BDS is concentrated in Europe and the US east coast. It’s separate from business and finance,” according to Pinchas Landau, a Jerusalem-based independent consultant.

In any event, says Landau, the Israeli economy is now geared towards Japan and China which are less sensitive to the Israel-Palestinian issue than Europe. China is already heavily involved in Israel’s port and transport infrastructure.

The threat of a third Palestinian intifada is frequently cited. But, isolated incidents aside, Jerusalem is crowded and Tel Aviv is hip, a magnet for a fashionable local and foreign crowd so cosmopolitan that, as Israelis like to wryly admit, “you could almost forget you were in Israel”.

The balance sheet of risks looks fairly positive therefore. “We had phenomenal data from 2016,” says Landau, who publishes a regular report on the Israeli economy. “The economy is doing tremendously well compared with Europe and the US and Israel will continue its pivot to Asia.”

The major risk he foresees is the uncertainty brought by the election of Donald Trump. But that’s hardly a concern confined to Israel, and something everyone will be trying to figure out in the months ahead.