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February 16, 2010
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Israel’s Manufacturing Trend from a Global Perspective
The recovery of economic activity in recent months is reflected in industrial production data, among other parameters. Industrial production continued to contract in the first half of 2009; in mid-year, however, the trend turned around and recovery was observed from then until year’s end. Just the same, industrial production decreased by 6 percent on average in 2009. Output in most industries plummeted; the only exception was electronic components, which celebrated 30 percent growth due to Intel’s new plant in Kiryat Gat. Electronic components aside, industrial production fell by 8 percent. The abrupt slowdown in manufacturing activity was accompanied by some 20,000 layoffs, 6 percent of sector employment.
Despite the grim effects on the crisis on Israeli industry, this sector took a relatively mild beating. This was largely due to the different structure of Israel’s industrial sector. Apart from the aforementioned centrality of Intel’s new plant in manufacturing activity in 2009, the defense and pharmaceutical industries also helped to cushion the blow. Industrial production in large economies, in contrast, was heavily affected by a severe decline in manufacturing of durable goods, especially motor vehicles.
In 2010, we expect Israeli industrial production to increase by 5 percent. We base this outlook on the recovery trend in manufacturing in recent months and additional indicators. The upturn will be driven by an increase in exports, abetted by growth in global trade.
Putting the Eurozone to the Test
The countries along Europe’s southern tier, foremost Greece, Spain, and Portugal, are suffering from large government deficits and rising debt/product ratios. These factors are fueling concern about national defaults, which, if they come to pass, will diminish Eurozone resilience, drive equity markets sharply down, and induce USD appreciation against the euro around the globe. The lack of control over monetary policy and the inability to induce depreciation are sapping these countries’ competitiveness and making significant fiscal cutbacks more and more necessary .
The weakest link among Eurozone countries is Greece, which the government’s inability to adjust its budget to the economic conditions, due to political instability, caused its deficit to soar and hiked the debt/product ratio to 112.6 percent. These developments led to loss of confidence in the Greek government’s ability to maintain a tight fiscal policy, impairing its ability to roll over EUR 20 billion in bonds that are due for redemption in April–May and necessitating a rescue program or a declaration of bankruptcy.
The upturn in fears about the Greek government’s ability to slash its deficit, coupled with rising yields on Greek government bonds, is making investors jittery about other European countries that have large deficits, foremost Portugal and Spain. As a result, these countries’ CDS sovereign premiums have risen. Consequently, the EU countries, headed by Germany, are elaborating a relief program for Greece.
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