Israeli economic growth slowed even more than earlier estimated, grinding down to a revised annualized rate of just 0.6% in the second quarter, the Central Bureau of Statistics reported on Tuesday.
Growth was depressed principally by a technical factor: Taxes on automobile imports surged in the first quarter, lifting gross domestic product by an annualized 4.4% as importers rushed to bring cars into the country before a revised green tax went into effect April 1.
In the second quarter, however, imports to a saturated local auto market plunged by more than 96%. The result was a sharp drop in GDP growth of just 1% when the CBS made its preliminary estimate in September.
The CBS said the revision downward to 0.6% reflected a drop in the increase of exports of goods and services, not counting polished diamonds and startup companies, during the quarter – from a breakneck annual rate of 13.6% in its September estimate to just 10% in its new one.
Discounting the impact of car taxes, GDP grew at a 2.7% rate in the second quarter, the CBS said. Business sector GDP growth was nil after two quarters of 5%-plus gains.
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Israel is contending with a slower world economy as U.S. President Donald Trump's trade war with China and the fallout from Brexit weigh on world trade. That impact, however, may only be felt in Israel next year. Despite the sharp second-quarter drop, Israeli GDP grew 3.4% in the first half of 2019 and two weeks ago the Bank of Israel affirmed its projection for 3.1% GDP growth in 2019.
However, the central bank slashed its 2020 projection by 0.5 percentage point to 3%. In addition, the International Monetary Fund lowered its growth estimates for Israel last week by 0.2 point to 3.1% annually in 2019 and 2020.
Investment in fixed assets also saw a drop in the second quarter at a 7.5% annualized rate after two quarters of strong growth. Investment in residential building rose at a 4% rate but investment in machinery and equipment, which was affected by the drop in vehicle imports, plunged at a 12.8% rate, the CBS said.
Consumer spending dropped at an 0.9% rate, or 2.7% on a per capita basis. Government spending rose at an 11.6% rate after two quarters of declines.
Slower growth poses a serious problem of the government as tax revenues have not kept pace with projections and spending has grown quickly, causing the budget deficit to balloon to well over the target level for 2019 of 2.9% of GDP.
The absence of an elected government this year – and the growing prospect of third election that extends the transition period to a new government into 2020 – has prevented the treasury from acting on the growing deficit. A slower economy in 2020 will make its job even harder when the time comes.