Israel: Terrorism Zaps the Economy

Already hit by the Palestinian uprising--the intifada--and the global high-tech slowdown, the Israeli economy was dealt a further blow by the September 11 attacks in the U.S. Now, the most recent surge in Israeli-Palestinian violence is causing more layoffs and business disruptions.

The once-booming high-tech sector has been especially devastated. Weaker U.S. and European demand has led to a sharp 11% drop in tech exports, the first yearly decline on record. Hundreds of local startups have either shut down or been forced to trim their payrolls. More mature technology businesses have also downsized. In addition, the intifada has hurt other parts of the economy. Thousands have been laid off in recent months in the tourism, construction, retail, and old-line manufacturing sectors.

As a result, the unemployment rate is rising sharply after holding relatively steady in recent years (chart). In the third quarter, the number of unemployed topped the record level of 1991, when huge numbers of immigrants from the former Soviet Union came to Israel.

Real gross domestic product is on track to grow less than 1% in 2001. For 2002, economists forecast that unemployment will top 10% by yearend and real GDP will rise by 2% at most.

The Israeli government is facing a tough task in countering the rapid downturn. Falling tax receipts have forced an upward revision of the planned budget deficit to 3% of GDP. But to meet even the revised target, the government has to cut the budget by $1.5 billion.

So far, the central bank's monetary policy has not helped matters much, either. Even with inflation in check, the Bank of Israel is keeping its key lending rate well above the U.S. Federal Reserve's target rate.

A recovery in the U.S. and in other Western economies is expected to lead to a partial improvement. But only a marked change in the Israeli-Palestinian situation will likely bring about a full-scale recovery.

By Neal Sandler in Jerusalem

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