Current crisis not on same scale as dot-com bubble, says Bank of Israel
A study conducted by the central bank on the consequences of the crisis on Israeli high-tech noted that only 9% of high-tech jobs are exposed to a high risk of layoffs
The decline in the value of the companies in the high-tech sector as well as the global economic slowdown will indeed harm the local high-tech sector, but not on a scale reminiscent of the bursting of the 2000 dot-com bubble. Also, according to the Bank of Israel's research, only 9% of the jobs in high-tech are considered to be at high risk of being cut during the crisis.
The Central Bank published a paper on Monday that examined the consequences of the falls in the markets, which were led by technology stocks, on the stability of the Israeli high-tech sector. The boom in high-tech that intensified since the Coronavirus crisis led to an increase in the state's income from taxes, an increase in the demand for workers, and an increase in their wages. Now this sharp growth has been hampered by the falls in the value of the companies and the fear of a global economic slowdown. Since high-tech is an important part of the Israeli economy in general and Israel's exports in particular, there is also the fear that damage to this industry will have a substantial effect on the growth of the economy.
The Bank of Israel estimates that in the short term the fall in the markets will have an impact on the high-tech sector and it will be manifested in a decrease in the state's income from taxes (mainly in income from the realization of capital gains), a possible slowdown in hiring, and an increase in the number of companies from the sector that will run into liquidity difficulties and close.
In addition, the declines in the markets are expected to reduce foreign exchange conversions by local high-tech companies, with the Bank of Israel estimating that the decline may amount to approximately $700 million, which is 0.16% of GDP - this, compared to the situation where the Nasdaq would have remained at the peak levels of the end of 2021.
As mentioned, despite these negative consequences, the Bank of Israel estimates that the crisis will not reach the severity of that which occurred during the bursting of the dot-com bubble at the beginning of the millennium, which then contributed to the deterioration of the economy into recession. "The Israeli high-tech sector today is more mature and diverse than it was then. Only 9% of those employed in high-tech today work in startup companies that are at the greatest risk of seeing their operations suffer a hit due to a slowdown in capital raising," the Bank of Israel notes.
The report found that 21% of the employees are in mature software companies (that is, those that generate regular and even profitable revenues), where the Bank of Israel maps the risk of layoffs as medium. 18% are in R&D centers of international companies, where the chance of layoffs is defined as low-medium and may occur if the economic crisis deepens, while 51% are in software companies without R&D centers or in technological factories, where the Bank of Israel estimates that the chance of layoffs is low. The Bank of Israel also notes that in the field of technological industry, the demand for products may even increase due to the global shortage of chips and disruptions in the supply chains.
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They also estimate that as Israeli high-tech has been characterized by a high demand for workers and a shortage of skilled manpower over recent years, it is likely that the hit in employment in some companies in the sector will be manifested mainly in the transfer of workers to more stable firms and less in prolonged unemployment.
At the same time, should the global economic slowdown worsen due to inflation and the increase in interest rates, the Bank of Israel estimates that the impact on the high-tech sector will be greater and that there are two main risks. The first is a decrease in demand for the products and services of the high-tech sector due to a slowdown in economic growth alongside the exhaustion of the increase in demand following the coronavirus. The second is a slowdown in the growth of the sector due to a continuous decrease in the availability of capital - this, in the event that the negative trend in technology stocks continues.
