A slowdown in Israel's technology sector has worsened in 2023, exacerbated by political turmoil, and the country may be detaching from broader trends that point to a global recovery, the state-backed Israel Innovation Authority said on Monday.
High-tech has for a decade been the fastest growing sector in Israel and crucial for economic growth, accounting for 14% of jobs and almost a fifth of GDP - not to mention innovations coming out of Tel Aviv adopted around the world in cybersecurity, artificial intelligence and other fields.
A global tech downturn began in the second half of 2022 when inflation and interest rates began to rise and supply chains faltered. In Israel, startup investment decreased by almost half and job recruiting slowed.
But as the negative trends appear to be reversing elsewhere, the problems in Israel have continued in 2023, the Innovation Authority said in its latest report.
This coincides with Prime Minister Benjamin Netanyahu's return to power and his push to overhaul the judicial system. The highly-contested plan, which would limit the power of the Supreme Court, sparked mass protests, caused volatility in the shekel and drew warnings from credit rating agencies.
The Innovation Authority said that "senior figures" in Israel's tech industry had warned of a backlash and of "foreign investors' concerns about continued investment in Israel."
A number of tech firms have reported moving funds out of Israel, while foreign inflows have slowed sharply, New startups are increasingly domiciling abroad.
There usually is a link, the authority said, when two quarters after U.S. stock markets begin to recover - as seen in a rise of the Nasdaq index this year - capital raising and employment in Israel would be expected to increase.
"Based on the indications presented so far, supported by April and May data, there is a genuine concern of a separation trend between the Israeli high-tech industry and global trends," the authority said.
So far in 2023, the Nasdaq has risen 29%, while Israel's main technology index (.TATECH) is up 7.8%.
Bank of Israel Governor Amir Yaron last month made a similar observation and pointed out that 50–80% of high-tech firms were registering overseas, up from 20% last year.
"Insofar as this trend persists, it may have an adverse effect on the economy in the long term," Yaron said.
