Israel's Economic Growth Surged 6.2% Higher in Fourth Quarter

Unexpectedly strong figure, which nears Chinese growth rate, causes shekel to strengthen against the dollar.

New cars lined up at the Eilat port.
New cars lined up at the Eilat port. Mori Chen

Israel’s economy ended 2016 with a bang, as surging exports and higher consumer spending and investment boosted gross domestic product a preliminary 6.2% on an annualized basis in the fourth quarter, the government said Thursday.

The Central Bureau of Statistics also revised its figure for growth in the third quarter, to 4.2% from 3.6%, which means GDP growth for all of 2016 is now a preliminary 4%, up from a previous estimate of 3.6%.

The unexpectedly strong figure for the fourth quarter caused the shekel to power higher against the dollar, climbing 0.8% to a Bank of Israel rate of 3.716, its strongest in nearly two and a half years.

The growth rate, which comes close to China’s 6.8% increase in the fourth quarter, marks a huge turnaround from a year ago. In the first quarter of 2016 the GDP, according to initial estimates, was expanding at a tepid annualized rate of 0.8%, and exports were sagging. Some economists were warning of a recession.

The figure was subsequently revised higher, and more recently there has been talk of the economy reaching full capacity as unemployment touches a 30-year low. Guy Yehuda, economist at Psagot Investment House, said it was unlikely the same pace of growth would extend into 2017 but it would be higher than it has been for a few years.

“Data on economic activity like these puts the Bank of Israel is a very uncomfortable place. On the one hand, a rate of expansion like this doesn’t justify interest rates at zero, especially when much of the growth is due to expanding credit,” Yehuda said. “On the other hand ... it would strengthen the shekel and make it harder to reach the inflation target.”

The central bank’s base lending rate is now 0.1% while the statistics agency reported on Wednesday that consumer prices fell 0.2% in January from December, with forecasts of inflation for the last at less than 1%, under the target range.

Fourth-quarter GDP growth was led by exports of goods and services, which rose at an 11.2% rate, turning around from an 0.8% decline in the third quarter. Investment in fixed assets, which includes machinery and equipment purchased by factories as well as construction, grew at a 7.4% pace, slackening from the previous quarters but still a high rate.

Finance Minister Moshe Kahlon could take some credit for the increased capital spending: Investment in residential construction grew at a 10.7% annual rate in the quarter, a sign that his efforts to increase the housing supply by increasing home-building activity are working.

On Wednesday, the statistics bureau said housing prices fell 1.2% in the month to December 15, its biggest decline in close to a decade.

Consumer spending continued to rise, but at a much slower rate for the second quarter in a row, at a rate of 3.5%, compared to 3.1% in the third quarter, It had been running at a rate of 6% to 10% in the year before that.

Moreover, the spending spree, such as it was, was focused on durables, most notably a big increase in automobile purchases, which was reflected in a 32% increase in household spending on consumer durables. Spending on other consumer goods actually declined in the quarter.

Business GDP grew in the second half of last year by 5.9%, which Ronen Menahem, economist at Mizrahi Tefahot Bank said is a “very impressive pace.”

“The component that led the growth in business sector GDP in the second half was investment in fixed assets, which climbed 10.2%. That raises potential economic growth going forward and ease pressure on prices,” he said.

Slower consumer spending growth combined with more investment and higher exports, Menahem added, should lead to “economic growth that is better balanced and more sustainable.”

With reporting by Omri Zerachovitz.