Israel 2016 Forecast

Unemployment is low even as more and more of the population joins the workforce. The increases we suffered in rates of poverty and inequality appear to be slowly reversing. Israel’s high-tech prowess seems undiminished and our GDP per capita, the best single measure of a country’s wealth, is gradually catching up with the OECD average. Economic growth in Israel has exceeded the world’s developed countries by a wide margin since 2008. Boringly, 2016 looks like more of the same. Nevertheless, there are a handful of major issues that will affect us for better or for worse this year. Here is how they will likely play themselves out.

Curve ball from the court?

Gas: Topic A for 2015, the controversy will be so last year in 2016 unless the High Court of Justice throws Bibi a curve ball, and rules that his decision to waive antitrust considerations for the gas industry was wrong. That seems unlikely, so the next issue is whether development of the Leviathan gas field will go ahead and in what form. The best-case scenario is that Turkey will opt for economics over Islam, patch up things with Israel and begin negotiating on a deal to buy Israeli gas. The first faint signs that may happen emerged this month, but there’s a long way to go. As to the gas framework itself, it is less than perfect but is a hell of a lot better than the alternative of protracted lawsuits and no energy development at all year for years to come. Israel got less than a good deal from the gas industry not because of a criminal sellout to powerful interests but due to regulatory inexperience and incompetence. We’re paying a price for that.

Housing: This is the biggest blemish on the economy and another instance of regulatory incompetence. Does anyone see a pattern developing?  In any case, despite the ham-fisted efforts of our leaders to rein in home prices -- most famously Yair Lapid’s Zero-VAT plan -- the market is gradually coming into balance. Since 2013, the net increase in housing demand is about 42,000 units a year has been roughly in balance with the number of construction starts. That doesn’t mean prices will start going down. First of all, it takes an average two years to build a house so the balance is only reaching the market now and, secondly, there is a big shortage of housing accumulated in the years of depressed building activity that will take time to fill. Thus, no bubble will burst because, unlike America a decade ago, the building boom isn’t speculative but is answering a real need. But the mad, mad rise in prices is likely over.

Arabs / Haredim: Here’s an example where policy makers have had one partial success and are now pursuing another one. Male Haredim are entering the workforce in big numbers even if their rabbis are still insisting that a good Jew should spending his days in the beit midrash instead of in an office or on the factory floor. Just like in Turkey (we hope), economics has gotten the better of religion: A combination of reductions in government aid to families and a tax regime that favors the working poor is what drove Haredim into the job market. The problem is the Haredim are, by conventional standards, uneducated, so jobs the economy is generating for them require few skills and pay badly. It’s not a good long-term solution, but it’s a start.

Next is to coax more Israeli Arabs into the workforce, especially women. Israel can’t wait. Arabs comprise a much bigger share of the population and Israel can’t afford to lose the contribution of their labor to the economy. The big challenge for both Haredim and Arabs is not just creating jobs but ensuring they have the education and skills for productive, well-paying jobs. It means making sure they get a higher education and don’t encounter discrimination in the job market. That will be a much harder task to perform than adjusting taxes and cutting allowances.

The boycott: A non-issue, but one to keep an eye on the oft chance it becomes one. Even when the BDS movement was riding high a year ago or more, it was on the back of mostly fictitious or inconsequential actions. The movement’s support is still confined to student and labor unions, cooperative groceries and left-leaning academic associations, even though Israel is now ruled by a rightist government with no good cops to present a prettier face to the world. BDS’ failure is partly due to the fact that economics usually trumps ideological politics just like it does religion. But it’s mainly because the Palestinians have been pushed far down the world’s to-do list. The carnage in Syria and the refugees flooding into Europe are now the main agenda items vis a vis the Middle East. Even a Third Intifada would have trouble competing for the world’s attention.

David Rosenberg