Israel's Economy Grows at Disappointing 2.5% Rate in First Quarter

Figure comes two days after government reports unexpectedly high 0.6% increase in consumer prices.

Reuters

Israel’s economy grew at a disappointing annual rate of 2.5% in the first quarter, as new investment continued to decline and government spending was restrained, the Central Bureau of Statistics reported Sunday.

Three months into the year, gross domestic product grew more slowly than the Bank of Israel and most private sector economists had been predicting (they had forecast between 3.2% to 3.6% for the full year). Business sector GDP expanded at a 3.2% pace in the three months.

But at least some economists noted that the CBS figure was preliminary and they saw signs of improvement in the months ahead.

“Examining the components of growth shows that the weakness springs mainly from a decline of investment in transportation goods, which rose sharply the quarter before, and not from a general weakness,” said Ofer Klein, chief economist at Harel Insurance & Finance.

But, he cautioned, “If in the next few months growth isn’t adjusted upward, our growth forecast for 2015 will be revised down to 3.1-3.2%, and our projection for 2.16 to 3.5%.”

The GDP figure came two days after the CBS reported that consumer prices rose 0.6% in April – slightly above economists’ forecasts. It was also the second month of rising prices after a long string of negative consumer price indices.

Economist said the higher-than-expected CPI made it highly unlikely the Bank of Israel would lower interest rates any time soon from their already record low 0.1%. Alex Zabezhinsky, chief economist at investment house Meitav Dash, said he was now confident the CPI would climb 1.4% over the next 12 months, putting it inside the government’s target range of 1%-3%.

First-quarter GDP growth was paced by a 5.5% annualized increase in consumer spending and a 3.1% increase in exports of goods and services.

Klein attributed the increased consumer spending to low interest rates that made borrowing easier and a big rise in the amount of cash held by the public, which reached 219 billion shekels ($57.3 billion) at the end of March.

Zabezhinsky said export figures have been disappointing for the last several months, but industrial production has been growing faster, suggesting factories are gearing up for higher exports going forward. “We expect exports to improve later in the year under the influence of a strengthening world economy,” he said Sunday.

Not everything was positive. Government spending – constrained by the absence of a 2015 budget, which meant that the government spent according to the parameters of last year’s budget – grew at just a 0.7% annualized rate.

But the heaviest weight on the first-quarter was investment spending, which fell at a 5.8% annualized rate, making it the fourth quarter in five that the figure has fallen.

Nevertheless, Klein noted that much of the decline was due to an 80% annualized drop in purchases of vehicles by businesses, which wasn’t surprising since the figure shot up in the fourth quarter of last year before a change in tax rules went into effect.

Moreover, he said, investment in residential construction rose at a 1.7% rate in the quarter, the first such increase in seven quarters.