Economic Growth Slowed Sharply to 2.2% in the Third Quarter

Exports of goods and services the single biggest factor, falling at annualized rate of 16.4%; government and consumer spending also down.

Israel’s economy slowed sharply in the third quarter as exports tumbled and the growth in consumer and government spending cooled, the Central Bureau of Statistics reported Sunday.

The CBS said gross domestic product grew at a preliminary annualized rate of 2.2% in the July-September period, slowing from a revised 4.6% rate in the second quarter. Exports of goods and services were the single biggest factor behind the slump. The CBS said they fell at a 16.4% annual rate in the third quarter, following a rise of 2% in the second quarter and 9.9% in the first.

Consumer spending continued to grow, but the rate slowed to an annualized 5.6% in the quarter from 6.2% in the second quarter. That worked out to a rise of 3.6% per capita.

This growth was led by a surge of spending by households on consumer durables − that is, items like automobiles and washing machines − which jumped on a per-capita basis at an 18.4% annual rate.

Excluding durables, spending was up at just a 2.2% rate − half of the pace in the second quarter, although higher than any time in the year before that.

The Bank of Israel in September forecast that the economy will grow this year by 3.6%, a slower pace that it had predicted in June after the government adopted an austerity budget for the years 2013-14 and weaker world trade. The central bank said growth would moderate further in 2014 to about 3.4%, and even less if the impact of the Tamar natural gas field is excluded. However, with the treasury sitting on an unexpected fiscal surplus of NIS 12.5 billion, some of the tax hikes and spending cuts slated for next year may be rescinded in the coming weeks.

The CBS said Sunday that government spending rose at a 4.5% annual rate in the third quarter, down from 7.9% in the second, although like consumer spending was higher than any time in the year before that. Excluding defense imports, government spending slumped to an annual growth rate of just 1.5%, the lowest in more than a year.

Imports of goods and services climbed at an 8.6% annual rate in the three months, marking the third straight quarter of gains. Excluding defense imports, diamond and transportation items like ships and planes, growth was an even faster 10.8% in the quarter.

The shekel has been strengthening against the dollar, increasing exporters’ costs in dollar terms and eroding their competitiveness overseas while making imports cheaper. Nevertheless, Israel’s international trade picture has brightened somewhat. The CBS said earlier this month that merchandise exports had begun growing at an annualized rate of 2.7% in the August-October period, reversing a 9.5% decline in the three previous months. Import growth, meanwhile, cooled to a 4.5% growth rate from 5.7% in the previous quarter.

In terms of investment, the overall rate grew at a 16.9% annual pace in June-September. However, the CBS said, investment in residential construction declined at a 2.9% rate, its second quarterly drop in a row. Investment in factors and other parts of the economy expanded at a 24.7% rate.

Business sector GDP, which excludes the government and the non-profit sector, grew at a 2.1% in the quarter, the CBS said.

Shaul Katznelson, deputy director of the Export Institute and head of its economics division, said the decline in Israel’s third-quarter exports goes against the global trend of rising trade. He said that it would be wrong to draw conclusions from a single quarter of trade statistics, but that for now the export picture for 2014 looks very bad.

According to the statistics institute, the drop in exports was led by high-technology goods, in particular exports of pharmaceuticals. Overall, tech exports dropped 10% from the second quarter while pharma exports plunged 28%, it said. Other big declines were reported in electronic components (17%) and chemicals (19%).

“It’s not a good sign that exports are falling at a time of recovery in global markets,” Katznelson said, attributing the decline to falling sales by Israel’s 10 biggest exporters, a group that includes Teva Pharmaceuticals, Intel Israel and Israel Chemicals among others. The 10 account for about half the country’s exports, according to the CBS.

Courtesy of Intel Israel