Israeli Economy Hit Four-year Low in Second Half of 2013

Economists are split about whether data points to continuing slump.

The economy grew in annualized terms by just 2.8% in the second half of 2013, its worst showing since 2009, the Central Bureau of Statistics reported on Sunday.

Gross domestic product in the second half was dragged down by a 1.1% annualized decline in exports of goods and services, the CBS said, although the rate of decline was lower than in the first half of last year. The GDP data came just two days after the CBS reported that January’s consumer price index fell 0.6%, double the rate of decline economists had forecast.

“After the Friday release of the consumer price index data, the GDP figures show categorically the extent of the economic slowdown in Israel,” said Yossi Fraiman, CEO of Prico Risk Management & Investments. “The economy is far from operating at full capacity. It demands a further, significant reduction in the interest rate to encourage economic activity, to reduce the cost of credit and discourage speculation in the shekel.”

Israel government bond prices rose sharply on Sunday in response to the CPI data as investors said the January deflation, and prospects for further price falls in February, raised the prospects of the Bank of Israel cutting the base rate from its current 1% level.

But the statistics were not all glum, and some economists said they expected growth to pick up this year. The CBS said the final quarter of 2013 saw economic activity picking up slightly to an annualized rate of expansion of 2.3%, accelerating from a third-quarter rate of 2.1%.

Government consumption grew by an annualized 4.8% in the second half and consumer spending jumped 4.3%. On a per capita basis, the rate of consumer spending growth accelerated to an annualized 2.2% in the second half from 0.9% in the first half. Moreover, while industrial exports dropped by an annualized 2.8%, tourism receipts increased by 13.4% and exports of other services by 3.9%.

Also notable was an 11.6% jump in investment in fixed assets in the second half of the year, a category that includes home construction and machinery and equipment and is often a barometer for future economic growth.

Alex Zabezhinsky, chief economist at Meitav DS Investment House, said in a report released on Sunday that January’s deflation did not signal economic weakness.

Although he forecast another decline in consumer prices this month, several forces were at work that would bring inflation back as the global economy strengthens.

“The improvement in the global economy is already impacting on [Israeli] economic activity,” Zabezhinsky said, adding that expectation of rising interest rates abroad would help to weaken the shekel and aid Israel’s hard-pressed exporters.

The CBS business tendency survey published last week showed that businesses are reporting improved conditions and are more optimistic about the future, including expectations orders for industrial products and for services to grow.

A look at some of the other economic data for the second half released by the statistics bureau Sunday revealed that imports of goods and services rose by an annualized 9.6%. Per capita purchases of household appliances rose by an annualized 9.8% in the second half after being static in the first half, although per capita automobile purchases declined in by 5.6% after surging 26% in the first half of 2013.

Bloomberg