Why is the market booming when industry is down?
Numbers show that unemployment in Israel is down, the stock market is stabilizing, and consumption is moderately on the rise. However, both industry and exports – considered main growth drivers – are down. Trend or coincidence?
The Red Lights Report published Monday by the Finance Ministry presented an overall economic picture borne out by data from the Central Bureau of Statistics (CBS) since the start of the year: the market is going in one direction (up), while industry and exports are on the decline.
Thus far, the decrease in industry has not been reflected in rising unemployment or a drop in investment in permanent equipment, two traditional ramifications of an industrial downturn. But that doesn't mean they're not around the corner.
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Nira Shamir, chief economist for Israel Discount Bank, said that the explanation lies in the demand for industrial products. "While in the US and the euro bloc the main industrial demands are local, in Israel only about half the industrial production is destined for the local market.
"Therefore, weakness in the global economy, particularly in the euro bloc, combined with a strong shekel, had a negative effect on local industry," Shamir continued.
'Elite' sectors, like high-tech, are down. (Photo: Shutterstock)
According to Shamir, this has created an unusual situation in which despite the fact that the market is generally growing and showing signs of recovery from the last quarter of 2011, Israeli industry was dropping off while US industry was on the rise.
CBS numbers point to another interesting trend: the main decline was noted in the "elite" technology sectors – namely Israel's flagship high-tech industry, including companies that manufacture electronics components and computers, communications equipment, aircraft, and medicines.
In 2011, industrial exports accounted for 78.5% of Israeli goods exported. Elite technological exports comprised 47% of all industrial exports, numbers that explain high-tech's strong effect on industrial figures in general.
Dr. Eldad Shidlovsky, head of the Economics and Research Department of the Finance Ministry, says that the government was following industry trends with concern, but the picture was still complicated and it was difficult to determine whether the weakness stemmed from one specific sector; from the growing effects of the European economic crisis; or from periodic fluctuation of very large companies.
"The picture is very complex," Shidlovsky said. "Our monthly figures do show a 7.7% drop in industrial exports from April 2011 to April 2012. However, there was a 7.9% increase in exports of service in the same period."
Shidlovsky: The export sector is diverse, so it's strong (Photo: Avishag Shaar-Yeshuv)
"In addition, in May the shekel lost 3.5% against the dollar. If this trend continues, it will have a positive effect on exports, even if it's only seen six months later. Also, there is regional compensation. In 2012 there has thus far been a 5.5% drop in exports to Europe and a 9% drop in exports to the US, but almost a 9% increase in exports to other countries. The developed world is in decline, but the sector is diverse, so it's strong," Shidlovsky explained.
He noted that the Treasury would, of course, prefer to see positive data about industry, which is considered a vital factor in a healthy market. However, they are not defining the current situation as a "recession," but as a period of "stagnation."
Addressing the weak numbers in the elite technological sectors, Shidlovsky said that they could be the result of periodic fluctuation of particularly large companies whose performance has a strong effect on the entire branch. "Recently, Teva's exports to the US have dropped off. It's hard to know if this is part of the company's plan or the result of something else. Teva's policies are complicated and we don't always know what their considerations are."
"Intel recently upgraded its factory in Kiryat Gat and increased its production lines. The renovation work caused a slowdown in the rate of exports, but by the end of the year it's supposed to pick up again," he noted.
"Our job at the Treasury is to always be worried, so we keep close track of what happens in industry. We have an arsenal of weapons for an emergency, and we will use it in a drastic case, like Greece leaving the euro bloc. But right now the picture is complex," Shidlovsky concluded.
