Leumi Economic Weekly

The surplus in Israel’s basic goods foreign trade account narrows
Israel’s overall trade deficit amounted to US$2.7bn in the first half of 2010, compared to US$2.0bn in the same period of 2009. This increase stems primarily from a rise in expenditures on oil imports. In addition to this broadly defined overall trade deficit, there is also a more narrowly-defined figure that neutralizes from the overall deficit volatile components such as ships, aircraft, fuel and diamonds. This “basic” trade deficit, which holds great economic significance in terms of the central trends of the economy, is presented in the accompanying graph.

In the last six quarters there was no deficit according to this basic account, but instead there was a surplus. What this means is that there exists a surplus of exports over imports in the foreign trade goods account however, the trend in recent quarters is one of a rapid decline in this surplus. The factor behind this narrowing surplus, in particular in the second quarter of this year, compared to the first quarter, is the decline in exports, and this development has negative economic implications of an economic slowdown, to be explained below. In contrast, imports expanded, albeit by only a low rate.

The weakness in exports is notable in most sub-sectors, except for the pharmaceuticals and the machinery and equipment sectors, which expanded by an accelerated rate in the second quarter. Despite what is written above, it is important to remember that the analysis of foreign trade data is based on data assessed in US dollar terms, such that it is likely to be influenced by, among other things, changes in the exchange rate of the dollar in the world vis-à-vis the different currencies. In the second quarter of the year the dollar strengthened (on a quarterly average) vis-à-vis the euro by of 9%, compared to the first quarter, a significant and severe rate in relation to the past.

Therefore, and taking into consideration the significant component of exports to Europe, it is possible the quantitative export data (that is to say, total exports excluding the impact of the currency) will not indicate such a negative trend as that which is reflected in the data based on nominal US dollar terms.

How is demand for Israeli export expected to develop?
What is the meaning of the decline in the basic export surplus? Firstly, it may have a moderating effect on economic growth, such that the second quarter 2010 economic growth rate may be below first quarter growth. Data on the composite state-of-the economy index from the months April – May strengthen the feeling of a slowdown in the second quarter of the year. Secondly, in the event all other conditions remain equal, a decline in the surplus of the current account of the balance of payments is possible, which will likely have an impact over the long-term in terms of the real exchange rate of the shekel.

Looking forward, the weakness in exports reflects a combination of the effects of moderate global demand, alongside the real appreciation in the exchange rate of the shekel already for two years. The index of leading indicators of the OECD (see graph), which relates to countries to which most of Israel’s exports are shipped, indicates an expected continued expansion in economic activity (the index relates to industrial production) however, there are strong and clear signs of a slowdown in the rate of economic growth.

In particular, in countries such as France, Italy, China, and India a decline was seen from the peak levels of growth registered just a few months ago, while countries such as Canada, Britain, and Brazil are close to this situation. In contrast, in Germany, Japan, the US, and Russia the index is continuing to show an expansion in activity, albeit at a slower rate. Taking into consideration the fact that the index precedes the activity it measures by six months, it is likely to reflect an expected slowdown from the demand side for industrial activity in Israel for the remainder of 2010 and throughout 2011. This is the main reason behind our forecast that GDP growth in 2011 will be more moderate to that in 2010, with our current forecast calling for about 3% GDP growth in 2011.

A peak in incoming tourism to Israel is expected this year
During January–June 2010 1.3m tourists entered Israel (data excluding seasonality), of these 1.1m entered by air. On average 188,500 tourists entered Israel by air each month in the first half of the year, compared to an average of 152,000 in the same period last year. Overall, during this period the number of incoming tourists to Israel by air increased 24% compared to the first half of 2009, and increased 6% compared to the same period in 2008. We note that in the beginning of 2009 there was a sharp decline in the number of incoming tourists due to operation “Cast Lead” in the southern part of the country. However, the year 2008 was a peak year for incoming tourists therefore, the increase in 2010 data compared to then indicates substantial growth in the sector.

In technical terms, the annualized rates of growth are expected to moderate during the months of the second half of 2010, since in the second half of 2009 a recovery in tourist entries to Israel already began to be felt. Under the assumption there will not be a deterioration in the security situation, the year 2010 is expected to end with a 15-25% increase in the number of incoming tourists compared to 2009. An increase in the number of tourist entries affects in a similar manner the revenues of Israeli businesses from activity with tourists, since the correlation between them is high.

According to data from the World Travel & Tourism Council on the first quarter of 2010, it is notable that the number of travelers by air increased substantially in the first quarter of the year, this in continuation of the trend that began during the second half of 2009. That is to say that the substantial upward trend in incoming tourists to Israel is in line with global trends. This increase occurred despite the volcanic eruption in Iceland during April, which significantly hurt the amount of international air travel, primarily in Europe.