Israel's economy expanded at a preliminary 2.9% annualized rate in the third quarter, its slowest in more than three years as exports and investment in fixed assets declined, the central Bureau of Statistics reported Sunday. The rate marked a sharp slowdown from a 3.4% pace recorded in the second quarter and from a 3.1% pace in the first quarter. In fact, the economy has been gradually decelerating since the final quarter of 2010 when it spiked to an annual rate of 7.2%. Business sector GDP, which excludes the public sector, rose a more sluggish 2.7%.

The slowdown comes at an awkward time. Israel is going into elections and the government never submitted its 2013 budget to the Knesset, meaning policy will remain rudderless until after the first quarter of next year. The Bank of Israel cut its base lending rate at the end of October, but inflation is looking to fall in the lower end of the target range and officials are concerned about rising housing prices. Those factors may restrain the Bank's willingness to lower rates further to buttress growth. The CBS said that consumer and government spending continued to show growth, increasing at a 1.5% and 1% annual rate, respectively. Against that, exports of goods and services both declined. Merchandise exports, not counting diamonds, were lower by a 1.5% rate in the third quarter.

Overall, exports of goods and services were down at a 5.4% rate for the three months, marking an abrupt turnaround from an 18% rate of growth in the second quarter. That decline was led by a 7.1% drop in merchandise exports, due to a 58% plunge in sales of diamonds abroad. Other exports rose fractionally. Service exports declined at a 16.3% annual rate.

Imports and goods and services fell at a faster pace of 12.5 in the quarter, although that was slower than the 15.2% in the second quarter. Civilian imports dropped at a nearly 20% rate.