Israeli Economy Rebounds in Third Quarter Thanks to Exports, Consumer Spending

Government says GDP grew at preliminary 2.5% rate, up from 0.2% in second quarter.

People walking past a women's clothes store's "mid-season sale" at the Azrieli Mall, Tel Aviv, September 2015.
Eyal Toueg

Israeli economic growth recovered in the third quarter after a weak first six months, growing by an annualized 2.5% as consumer spending, exports and investment rebounded, the Central Bureau of Statistics reported Monday.

The preliminary rate marked a sharp acceleration from 0.2% in the second quarter and a 2% rate in the first, although it remains far below the 4-5% range economists say it could be growing at. Business sector GDP, which excludes the government, showed an even sharper turnaround, expanding at a 2.7% rate in the third quarter, after contracting 0.9% in the second.

The third-quarter growth rate matched the consensus economists’ forecast in a Reuters poll. The statistics bureau has previously forecast that the economy would grow 2.5% this year, slightly down on 2014’s 2.6%.

The Finance Ministry and Bank of Israel are likely to be encouraged by the latest data. In September, both lowered their growth estimates to 2.6% from a previous range of 2.9-3%.

The treasury is counting on 3% growth next year to make its 2016 budget meet spending and deficit forecasts. While tax revenues have been growing strongly this year, the sluggish economic growth was causing some economists to doubt whether the pace could be sustained for long.

Meanwhile, at the Bank of Israel, policy makers have hesitated to cut the base lending rate below its record low 0.1% or use unconventional policy measures, even though growth was slowing and inflation negative. The GDP data wasn’t the only piece of good news the bank got this week: a 0.1% rise in consumer prices was the first increase in two months.

The central bank has downplayed both, saying weak growth has been due to largely temporary factors, while the negative inflation stems from falling commodity prices and lower costs in the economy, rather than a drop in consumer demand.

Consumer spending, which had been the economy’s main growth amid slowing exports, rebounded in the third quarter to 2.4%, from an anemic 1.5% in the second. Still, consumer spending had been growing at a quarterly rate of 6-7% from the second quarter of 2014 through the first quarter of this year.

Exports of goods and services, which account for as much as 40% of the economy, grew at a 4.4% rate in the quarter, after two quarters of sharp declines. Not including exports of polished diamonds and startup companies, the turnaround was even more dramatic – an annualized increase of 9.7% versus declines of 11.4% and 4.7% in the two previous quarters, the statistics bureau said.

Investment in fixed assets, which had been weighing on the economy, also showed improvement, the bureau figures showed. They rose at a 0.7% rate in the third quarter, led by a 1.7% increase in residential construction. Investment in machinery and equipment was up by a smaller 0.7%, but that was also an improvement after two quarters of big declines.

Government spending rose 1.6% after falling in the first half of the year. Imports of goods and services were down 0.2%, extending a 7% decline in the second quarter. But discounting defense imports, ships, aircraft and diamonds, imports showed a modest 1.3% annualized gain for the three months.

Reuters contributed to this report.