Steinitz and Netanyahu - Alon Ron
Steinitz, left, takes collective credit for the Israeli economy’s rapid growth; and Netanyahu. Photo by Alon Ron
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The Israeli economy grew like a weed in the last quarter of 2010, expanding by 7.8% in annualized terms. Growth for the last six months of the year therefore ran at a handsome 5.6%, and the figure for the year is 4.5%, well beyond the performance of most other developed economies. The figures are in annualized terms (meaning growth would be 7.8% if it maintained this pace for a year ).

Just three days before, using its spanking new "nowcasting" model, the Bank of Israel predicted that the Israeli economy had grown between 4.3% and 4.6% in the last quarter of 2010. So much for the model. "The figure is much higher than expected. It reflects an increase in all branches of economic activity," said Rafi Guzlan, economist at Leader Capital Markets.

While the Israeli economy grew by 7.8% in the last quarter, according to data released by the Central Bureau of Statistics yesterday, the euro-zone economy is estimated to have grown by just 0.3% in that period. The German economy expanded by 0.4% and the French by 0.3%, Eurostat said yesterday.

The figures for the last quarter bring Israeli economic growth for the year to 4.5%, up from just 0.9% in 2009. The French economy grew by just 1.5% in 2010, outpaced by the German economy, which grew by 3.6%. The U.S. economy expanded by 2.9% in 2010 after contracting the previous year. The Japanese economy is estimated to have grown by about 3% in 2010.

Michael Sarel, chief economist at the Harel business group, said the fourth-quarter figure was astonishing. "Most forecasts, including by the Bank of Israel, had been for 4% to 5%," he said. "A difference of 3% here is like the consumer price index surprising by a whole 1%."

How did economists get it so very wrong? "There are components for which there aren't any prior indicators, so they're hard to forecast, such as much of public spending, some of private consumption and investment, mainly by business," Sarel explained.

A delighted Prime Minister Benjamin Netanyahu said the growth figures attest that the Israeli standard of living has risen. "That's the upshot of responsible economic policy that does not exceed the budget's boundaries," he said. "The government is investing a great deal of money in developing infrastructure, bringing the periphery closer to the center, creating jobs and encouraging exports."

A spike in growth is one thing, maintaining a rapid pace is another. Finance Minister Yuval Steinitz notes the issue of sustainability.

"If we have the good sense to maintain budget discipline and cooperative relations between the various economic forces, Israel can sustain this pace of growth," Steinitz said yesterday, reflecting the delight among treasury officials about the stellar Israeli statistics. If sustained, the effects of Israel's economic expansion would be felt by all, he added.

The powerful figures for the second half of the year, during which the Israeli economy expanded 5.4% (in annualized terms ), attest to the success of the government's responsible economic policy, Steinitz said.

Based on the unexpectedly high growth figures and commensurate surge in concerns about inflation, economists broadly concur that the Bank of Israel will be raising interest rates at the end of the month. Some even predict a half-percent rate hike. Currently central bank interest is at 2.25%.

Ayelet Nir, the chief economist at IBI, sought to restore some sobriety. "The rapid pace of growth by private consumption per capita attests to an improvement in living standards among households," she said. "But our exports don't look good." She also agreed that the Bank of Israel would be raising interest rates on Monday. Leader Capital Markets' Guzlan thinks so too - and he too suspects that the central bank may raise its rate by more than 0.25%.