Israel's Treasury Warns: Economic Growth Will Slow

Report says high levels of new-car purchases and investment that have paced the expansion have begun to plateau and will tail off in coming quarters.

A traffic jam on Route 1.
A traffic jam on Route 1. Olivier Fitoussi

The Finance Ministry on Sunday poured some cold water on the unusually strong economic-growth figures released by the Central Bureau of Statistics last week, warning that the pace of growth will probably not continue much longer

“The data on growth for 2016 indicate that the current rate of growth isn’t necessary durable,” treasury Chief Economist Yoel Naveh said in a report. “Two significant but unsustainable factors influenced growth in recent quarters – the purchase of vehicles and the upgrade of Intel’s plant [in Israel].”

The treasury report came days after the CBS said gross domestic product grew at a 3.2% annual rate in the third quarter and revised its figure for the second quarter to a 4.9% rate. That compares with growth last year of 2.5% and caused many economists to revise their growth esti mates upward. Given the recent history of revisions, such as the first-quarter figure being raised from a preliminary 0.8% to 3.2% now, it is likely that the third quarter’s 3.2% will also be adjusted higher.

But Naveh said there were already signs that the consumer boom that began just over a year ago and had been leading overall economic growth was levelling off. He noted that consumer spending only contributed 1.7 percentage points to growth in the third quarter, as evidenced by slowing sales growth at chain stores, imports of consumer goods and purchases made with credit cards.

Purchases of consumer durables, particularly cars, also slacked in the third quarter. New-car purchases reached record highs in the quarter, but the rate will now either plateau or start falling back, the treasury said.

Spending spree
After inflation, adjusted for seasonal factors, % growth

The huge increase in the number of new cars purchased – over 300,000 new cars will be added to the country’s roads in 2016, from 254,000 last year and 205,000 in 2012 – also boosted the figure for investment, not just for consumer spending. That is because about a third of all new cars are bought by leasing companies, which record them as a capital expense.

Meanwhile, the Intel semiconductor plant in Kiryat Gat formally dedicated its new $6 billion production line last week, meaning its massive spending on machinery and equipment is winding down. On the other hand, as the treasury report noted, Intel should begin stepping up exports, which will help Israel’s flagging level of exports overall.

After a brief recovery, Israel’s exports of goods and services contracted at a 4.7% annual rate in the third quarter. Regarding the biggest components of exports, the treasury noted that pharmaceuticals had recovered showing annualized growth of 112% while exports of chemicals were down due to lower global prices for potash, Israel’s main chemicals exports. Exports of electronics and electronic components were also down, but the Finance Ministry said it expected to see that recover as the new Intel production lines ramps up production.

Exports have traditionally been Israel’s economic growth engine, and economists have warned that the consumer boom cannot last indefinitely and exports will eventually have to take over if growth is going to be sustainable. But the outlook is for slower world trade growth generally, especially after the election of Donald Trump and his promise to crack down on what he says is abuse of trade agreements by other countries and opposition to new trade initiatives.

The treasury noted that the consumer-led economic growth over the past two years had helped swell treasury coffers and given Finance Minister Moshe Kahlon far more latitude with budget planning and allowed him to cut taxes. In the 12 months through October, Israel’s fiscal deficit was just 2.1% of GDP, much less than the 2.9% the treasury is budgeting for 2017 and 2018. But Naveh warned in the report Sunday that as the consumer boom wears off the tax windfall is unlikely to repeat itself during 2017 and 2018.