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Beware The Black Swan. Interview with Prof. Shlomo Maital

Viewpoints, July 2016

Shlomo Maital

Israel’s economic growth is slowing down. Economist Prof. Shlomo Maital indicates how to handle the situation

IPDF: What, then, are the real pressing issues?

SM: Clearly, Israel’s slumping economy and lagging exports.   In 2015, Israel’s services exports fell by 3 percent, to $34.4 billion, for the first time in 6 years, since the 2008 global crisis.  Much of the drop was the decline in tourism, which slumped by 6 percent.   Overall, total exports fell by 7 percent last year, totaling $45.7 billion, continuing a downward trend evident since 2012.

Partly as a result of weak exports, Israel’s economy grew by only 2.3 percent last year, its slowest pace since 2009.

These worrisome trends have become more pronounced in 2016.  In March-May exports of high technology industries fell by 27.8 percent.   Israel’s trade deficit in goods (the surplus of goods imports over goods exports) was 14 billion shekels in January to May.

The only thing propping up Israel’s economy was a wave of consumer spending; shoppers at the Malha Mall in Jerusalem. Credit: Yehudit Garin-Kol / PikiWiki

The only thing propping up Israel’s economy was a wave of consumer spending; shoppers at the Malha Mall in Jerusalem. Credit: Yehudit Garin-Kol / PikiWiki

Last November, the OECD (Organization of Economic Cooperation and Development), a group of some 34 developed countries, predicted Israel’s economy would grow by 3.25 percent in 2016.   In May, OECD economists revised this forecast sharply downward, to only 2.4 percent, and even that low number may be adjusted downward later.

The only thing propping up Israel’s economy was a wave of consumer spending, buoyed by low interest rates and growing consumer debt.  Consumer borrowing rose by 9 percent in 2015 and continued to grow in 2016.   When consumers begin to perceive the weakness in the economy, that growth engine too will diminish.

IPDF: How did this come about?

SM: Who in the Cabinet is taking responsibility for the slumping economy?  Apparently, not Finance Minister Moshe Kahlon.  His chief economist Yoel Naveh “put the sagging export performance into perspective,” noting that 80 percent of the export decline in 2016 came from three industries, “pharmaceuticals, electrical components and chemicals.”  These three industries account for half of Israel’s total exports, he admitted.

“Citizens might rest easier if their government took some time to think about how to respond to some worst-case black swans”

Naveh believes this is not a “macro” problem, but a “micro” one.  For instance, Intel’s Kiryat Gat microprocessor fabrication plant is retooling for new 10 nanometer chips, hence has briefly suspended production (and exports).

While the Cabinet appears to be asleep, the Bank of Israel stands watch.    Bank experts recently analyzed an “extreme case” geopolitical crisis in Israel, driven by sharp rises in inflation, interest rates and unemployment, a 25 percent fall in housing prices, a 40 percent decline in the Tel Aviv 100 stock index and a 40 billion shekel write-off of bad loans.

IPDF: What can be done about it?

I would like to see the Cabinet discuss this scenario, build contingency plans for each ministry, and for once, “work for us” —   pay attention to serious matters, rather than trivial, marginal ones (such as the Prime Minister’s wife Sarah Netanyahu’s treatment of her employees) that seem to take up much of the Cabinet’s time and attention.

US author Nassim Nicholas Taleb warned of black swans in his book by that name – unexpected and unpredictable events (so named, because black swans were believed not to exist, until some were found).

In the volatile Mideast, the only thing predictable is that there are frequent, largely unpredictable black swans.  Citizens might rest easier if their government took some time to think about how to respond to some worst-case black swans – including those already flapping their wings here at home.

Dr. Shlomo Maital is senior research associate at the Samuel Neaman Institute for Advanced Studies in Science & Technology, Technion-Israel Institute of Technology, and professor (emeritus).