At a time when global growth is tepid and trade remains weak, the tiny Middle-Eastern nation of Israel shows that tumultuous economic conditions do not have to be a stumbling block. As the country contends with mounting political risks in neighboring countries, the focus on innovation and self-sufficiency has seen Israel overcome seemingly insurmountable challenges. The economy largely reflects this reality, with growth humming along while unemployment remains low.
Furthermore, the discovery of rich deposits of energy off the Mediterranean coast and in the northern part of the country could potentially turn the nation into a net energy exporter over time. Ongoing rapprochement with Turkey means that Israel could one day find itself piping gas to Europe should an agreement be reached, opening up vast new opportunities for the nation as it broadens its strategic influence.
Improving Outlook Overshadows Political Risks
Israel has long been a powerhouse of global innovation, thanks in large part to difficult regional circumstances that have forced it to maintain a technological edge. Nearly all major multinational technology companies have a local research and development presence in the country. The names are numerous, including Google, Facebook, Apple, HP, Intel, Microsoft, PayPal, eBay, and IBM to highlight a few. Technology buyouts from the country’s budding startup and hi-tech sectors continue to climb as local venture capital funding exceeds nations with as large a footprint as Japan. However, one of the most impressive technological achievements for the country has been desalination.
Due to its geographical characteristics, Israel has few sources of fresh water. This deficiency led Israel to become one of the leaders pioneering the desalination process, with some of the most efficient operations ever built.Adding to the positive outlook are vast discoveries of deposits of gas off the Mediterranean coast.Besides bolstering its economy with more internal energy security, Israel has the potential to export surplus production. Already, a large delivery deal has been struck with neighboring Jordan to the tune of $10 billion over 15 years. Should Israel be able to complete a pipeline linking its production to Europe, the economy could quickly find itself benefiting from its increased energy affluence.
Although boycott movements over the political apparatus have been gaining steam in recent years, Israel has been able to shake off these developments, especially evidenced by warming ties with Gulf countries. Tension still exists with northern neighbors Lebanon and Syria, although strong relations with Egypt and Jordan alongside thawing contacts with Saudi Arabia are paving the way for Israel to lead by example as countries try and emulate Israel’s explosive growth and innovation prowess. At a time when most of the region is facing war or regional security threats, the Israeli economy is humming along, growing 1.10% during the second quarter with the annualized pace of expansion rising to 4.30%.
Challenges Remain
Despite explosive GDP growth and unemployment which is trending below 5.00%, Israel does face some unique obstacles towards sustained development. For one, the economy has been facing deflation since 2014.A high degree of sensitivity to exchange rates is part of the problem. However, other structural issues such as rapidly rising housing prices and a substantial component of the population that chooses to remain outside of the workforce are proving to be impediments to even higher growth. Furthermore, the high cost of living has created an ongoing brain-drain as high tech employees are poached by global firms and startups across the world.
As a proxy for the economy, the Tel Aviv 25 benchmark equity index has shown itself to be wildly pessimistic about the outlook. The benchmark has returned -11.41% over the last 52-weeks, with only 10 of the 25 components showing positive returns over the same period. Furthermore, the index appears to be on the verge of a breakdown considering the descending triangle pattern and the moving averages. The descending triangle pattern is notoriously bearish, with any break below support at 1382 paving the way for further losses. Adding to the pressure is the recent moving average crossover. The 50-day moving average crossing below the 200-day moving average is a notoriously bearish signal, with both moving averages acting as resistance against any upside recovery in the benchmark.
Looking Ahead
Even with a fruitful economic outlook ahead considering the backdrop of innovation, technology, and energy, the TA-25 shows few signs of bucking the prevailing downtrend. However, looking beyond equity performance, Israel has shown that it is possible to overcome even the most threatening of challenges. Economic activity reflects this reality, with growth indicators and policy pointing to more years of prosperity for the advanced economy while other global economies languish.Should the focal point of Israel’s success remain its innovation, the TA 25 will likely eventually reflect this consideration despite a longer-term downtrend. Despite some rough edges and hurdles, Israel remains a diamond in a sea of lukewarm global economic activity.
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