Growth could become stunted.
Growth could become stunted. Photo by Tomer Neuberg
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Moti Kimche
New Israeli Shekels. Photo by Moti Kimche

Israel's economy grew more slowly in the first quarter than had previously been estimated, the Central Bureau of Statistics reported on Monday.

The gross domestic product actually expanded at a 2.7% annual rate in the first three months of the year, according to the CBS, which lowered the figure for a second time since publishing a preliminary estimate of 3% two months ago. It later issued a revised estimate of 2.9%.

The new figure marks the fifth consecutive decline in GDP growth since it peaked at a 7.4% rate in the final quarter of 2010. The economy grew at a 3.2% rate in the third quarter of 2011 and a 3.1% rate in the final quarter, according to the CBS.

The slowdown promises to make it even tougher for the Finance Ministry to come up with the tax revenues to prevent the budget deficit from widening, and to limit the extent of tax hikes next year. But such measures will be resisted by the social-justice protesters, as well as by cabinet members and lawmakers eyeing the 2013 elections.

The 2.7% increase in first-quarter GDP reflects growing imports, consumer spending, investment in fixed assets and higher government spending. The area that hurt growth the most was merchandise exports, which dropped at an 8.8% annual rate in the three moths.

Pacing the decline in exports was polished diamonds, which plummeted at a 48% annual rate - 15.5% in the three months alone. That was partly offset by a 16.5% jump in exports of services, which meant that the overall decline of exports was just 2.2% on an annualized basis. That was a smaller decline than in the previous quarter, when exports dropped at a 3.9% rate.

Imports of goods and services rose at a 34.4% rate in the first quarter, reversing a single-digit decline in the previous three months. That reflected a 34% jump in imports of goods and a 51% increase in service imports.

Business sector GDP rose even more slowly in the first quarter than the overall GDP. At a 2.2% rate, its increase was far slower than in the fourth quarter of last year, when it advanced 3.4%, and the third quarter, when it was up at a 4.4% rate.

The increase in business GDP was spread across a wide range of sectors, including construction, transportation, hospitality, and financial and business services. But manufacturing output showed a decline. As the cabinet was voting on raising next year's budget deficit to 3% of GDP, Bank of Israel Governor Stanley Fischer came down firmly against such a large increase.

The new target is twice what the government had originally set, and above what the treasury had been advocating as a revised higher target.

One of the central questions facing the various sides was the rate of growth on which the deficit target should be based. More economic growth means more taxes collected and more money for the budget.

Finance Minister Yuval Steinitz had been talking about annual GDP growth of 3.5% to 4% in the next few years. But Fischer, looking at the slowing world economy, expects that Israeli growth will be much less than what Steinitz was anticipating.

"The updated economic data simply confirm what we have been feeling for a long time," Tzvi Oren, president of the Manufacturers Association, said in response to the newly released CBS figures. "The decline in exports has to be a cause of concern for policymakers. A situation where exports are dropping while local manufacturing is being replaced by imports can rapidly create a situation where industry can't preserve - much less create - new jobs."

Oren said the government must begin exploring ways to renew export growth and to protect domestic industry. He suggests delaying plans to reduce duties on a host of consumer products, as the government announced it was doing earlier this month.