What’s the reward for financial prudence?

As Israel’s financial planners are finding out; just because you look after yourself according to the textbooks, it does not mean that you will secure the benefits.

Let’s look at the boring stats. Israel’s economy grew by 4.8% in 2011. Unemployment sunk to a record low of 5% in December. Inflation is under control. Oil and gas exploration is likely to produce a boom starting from early 2014. Everything should be rosy. And yet….

Welcome to Europe. Political and economic leadership has been sorely lacking from the EU big guys over the past few months. As the PIGS (sic) and others have led the founders of democracy towards a very gloomy financial disaster, the IMF and the Bank of Israel have gradually been revising downwards the outlook for the Holy Land. Current estimates put growth at “only” 2.8% – just enough to keep in line with population growth, although still ahead of most competitors.

Just how impressive would that achievement be? Well Israel has barely 7.8m people, excluding the Palestinian territories. It is the size of Wales, yet has mountains, 40% is non arable and has the lowest point in the globe. A Jewish State, around 21% is not Jewish, and there are violent external geopolitical pressures. Its relative spending on defence is disproportinately high in relation to its main economic markets.

Simply put, Israel is a country of “extremes and contradictions”. And yet, over the past decade or so, Jerusalem has created a business model based on innovation and sound fiscal management that allows the economy to grow.

Will the European downturn impact worse than feared? Will internal structural difficulties override political capabilities of Netanyahu? How will the Bank of Israel protect the money supply, while ensuring the shekel remains competitive in a period of weak global trade?

No, 2012 will not be an easy year to manage at the micro nor macro level. That said, Israel has kicked off from a solid base. See you in 12 months time.