Israel’s economy keeps growing faster than rest of developed world

Oct 02, 2011 12:00 AM

Never mind the collapse in confidence in Europe, the Palestinian proposal for UN recognition and heightened tensions with neighbouring Egypt and long-time ally Turkey. The Israeli economy just keeps growing faster than the rest of the developed world.
The International Monetary Fund (IMF) earlier raised its forecast for the country and cut its estimate for the global economy on the impact of the European debt crisis. Israel’s gross domestic product (GDP) will expand 4.8 % this year, according to the lender. That’s up from an April forecast of 3.8 % and triple the pace for the average of the 34 advanced economies.

Citigroup said on September 18 it would establish a new Israeli research centre and Standard & Poor’s a week earlier raised the country’s credit rating. It cited the discovery of two gas fields off the coast of Israel. Mellanox Technologies, the Israeli adaptor maker part-owned by Oracle, said sales would grow 80 % in the third quarter.
“The Israeli economy is very vibrant,” Finance Minister Yuval Steinitz said last month. “We enjoy very low unemployment and nice economic growth and this is mainly because we managed to develop very advanced hi-tech industries and very strong exports.”

The stock market in Israel, whose population of 7.8 mm is similar to Switzerland’s, was upgraded to developed-market status by MSCI in May last year, the same month the 63-year-old country was accepted into the Organisation for Economic Co-operation and Development. The country has about 60 companies traded on the Nasdaq Stock Market, the most of any nation outside North America after China and is home to the largest number of start-up companies per capita in the world.
Israel ranks third in terms of projected growth this year among MSCI’s list of 24 developed economies, after 6 % for Hong Kong and 5.3 % for Singapore, according to the IMF.

“Israel’s exports are high-added value exports like informatics and technology,” said Jean-Dominique Butikofer, a fund manager who helps oversee emerging-market debt at Union Bancaire Privee in Zurich, including Israeli bonds. “They’re not exporting Gucci bags. If there’s a slowdown, these are the kind of assets that are good to have.”
Venture-capital backed Israeli technology companies raised $ 364 mm in the second quarter of this year, a 77 % jump from the year-earlier period, according to a PwC report. Seventy-six companies raised funding in the three-month period, compared with only 60 last year, the report said.

The good times may not last. After withstanding a Palestinian uprising in 2000 and a credit crisis in 2008, Israel now faces troubles both political and economic. Palestinian Authority President Mahmoud Abbas has been planning to ask the Security Council to recommend that Palestine become the body’s 194th member.
Bank of Israel governor Stanley Fischer earlier voiced concern about the possible effects a prolonged global slump and geopolitical friction could have in coming months. His worry was reflected in the IMF forecast for next year, which predicts a slowing to 3.6 %.

Next year’s IMF outlook of 1.8 % growth for the US and 1.1 % growth for the euro area, Israel’s two main markets, is likely to moderate demand for the country’s exports, one of the main growth engines of the $ 217 bn economy.
Israel also faces security threats as the so-called Arab Spring creates turmoil in its Middle Eastern neighbours. In Egypt, the pipeline that carries gas to Israel has been bombed four times since the January uprising. A cross-border attack by terrorists who came from the Sinai peninsula killed eight people near the resort city of Eilat in August.

Turkey, one of Israel’s largest regional trading partners, expelled the Israeli ambassador and halted defence purchases after Israel refused to apologise for a commando raid last year on a Turkish vessel attempting to breach the blockade of the Hamas-controlled Gaza Strip that left nine dead.
Israeli five-year credit-default swaps, or the cost of protecting government debt against non-payment for the period, are at the highest level in at least two years, according to data provider CMA. The shekel has weakened more than 4 % this year, headed for its biggest annual drop against the dollar since 2005.

The economy may already be feeling the bite. Exports, excluding ships, aircrafts, and diamonds, fell for the fourth month out of five in August to their lowest since January.
“You have a situation where the global economy is clearly running into a roadblock and having a tough time while the Israeli economy is going to bend but it isn’t going to break,” said Daniel Hewitt, senior emerging-market economist at Barclays Capital.

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