Israeli Economy Weathers Global Storm

Strong exports led by the tech sector, healthy consumer spending, and the lack of a housing bubble help shield Israel from the wider economic crisis

The global economy may be shaky, but Israelis don't seem to be tightening their belts. Consider car sales, long an indicator of how an economy is faring. Israeli auto importers have been enjoying an unprecedented boom, with 81,500 cars sold in the first four months of this year, up 61% even from the record pace set last year. To meet demand, the local Toyota (TM) importer asked for an increased allocation from Japan, and Toyota agreed to lift shipments by 12%. But that still leaves Israeli car-buyers with a considerable wait for popular Corolla and Prius models.

It used to be that when the U.S. economy sneezed, Israel caught a bad cold. These days, the Middle East nation's economy is proving far more resilient than in the past. "Israel will be one of the countries that is least affected by the global economic crisis," predicts Leo Leiderman, chief economist at Bank Hapoalim (POLI.TA), the country's largest bank.

Booming exports, the absence of a local housing bubble, and robust consumer spending all have contributed to continued confidence. Israel's economy has grown by 5% or more for the past four years, and even with the clouds on the global horizon, economists are forecasting a healthy 4% growth rate in 2008.

Shekel's Strength Has Limited Impact

The Bank of Israel even appears to have shifted its emphasis in recent weeks from concerns about growth to worries over inflation. Following a 1.5% jump in the consumer price index in April, the central bank is now expected to hike rates later this month by half a percentage point. The discount rate currently stands at 3.25%, the lowest level in Israel's history.

The low interest rates have helped drive Israel's currency, the shekel, up 30% against the U.S. dollar since November, 2005—its highest level against the greenback in more than 11 years. But despite the fears of industrialists, the shekel's strength so far has had only a marginal impact on exports, which rose at a 22% clip in the first four months of this year. "The high-tech nature of Israel's exports makes the balance of payments less sensitive to a U.S. slowdown," says David Lubin, an analyst at Citigroup (C). Technology accounts for nearly half of all Israeli industrial exports.

In the past few weeks, telecommunications and software companies such as Check Point Software Technologies (CHKP), Alvarion (ALVR), and Nice Systems (NICE) have reported sharply higher first-quarter sales and profitability. "Our products and solutions focus on a niche that is in big demand, even in times of recession," notes Haim Shani, the president and chief executive of Nice, a maker of digital recording and archiving systems. The company continues to hire locally but has been trying to combat higher costs by granting more modest wage and merit increases in an effort to remain competitive.

Robust Property Prices

But high tech is not the only export sector benefiting from the boom. Two of the country's largest companies, fertilizer maker Israel Chemicals (ICL.TA) and pesticide producer Makhteshim Agan Industries (MAIN.TA), have seen skyrocketing demand for their products on world markets. "We've been able to offset our higher costs in Israel by sales to markets in Western Europe and Brazil whose currencies have remained strong," says Avraham Bigger, Makhteshim Agan chairman and CEO. On May 14, his company reported a $91 million net profit on $722 million in revenues. One of the few export industries that has seen a decline is the diamond sector, which is highly dependent on sales to the U.S.

The country's real estate sector also has remained strong—and largely untouched by fallout from the subprime crisis that has hit many other markets. Rents for prime office space in the Tel Aviv area rose by nearly 40% in 2007, and while that's expected to slow this year, analysts still expect gains of 10%-15%. "Our occupancy rate is approaching 100% and we've got a long waiting list," says Arnon Toren, CEO of the Azrieli Center, the largest office complex in Tel Aviv. The situation is much the same at other major office blocks in Israel's financial capital. A leading Tel Aviv real estate company searched for nearly six months to find suitable premises to house the Israeli operations of two leading foreign investment banks.

Commercial real estate has been almost as strong and shows no signs of any letup. Few, if any, vacancies are being reported at any of the country's dozens of shopping malls, and rents are continuing to rise. The sole exception is residential housing, where prices have stabilized, particularly at the high end. The main reason is a sharp decline in the number of foreign buyers, who have previously driven up prices of luxury properties in Tel Aviv and Jerusalem.

In recent years, the economy largely has been immune to the vagaries of Israeli politics. Even the recent scandals involving Prime Minister Ehud Olmert have had little, if any, effect. Right now most signs are positive, but experts concur that if the global economic situation deteriorates further, Israel could face tougher times.

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