Third-quarter GDP Growth Hits 4.1%, Beating Forecasts

A deeper review of the statistics shows that the overall economic picture may not be as positive as the gross domestic product growth figure alone indicates

A view of Tel Aviv, June 8, 2017.
Eyal Toueg

Israel’s economy expanded at a 4.1% rate during the third quarter of 2019, an impressive figure that overshot most forecasts, according to figures published by the Central Bureau of statistics on Sunday.

However, a deeper review of the statistics indicates that the overall economic picture may not be as positive as the gross domestic product growth figure alone indicates.

The chief economist at the Finance Ministry forecast last week that third-quarter growth was 2.5% to 3% in annualized terms, meaning the economy would have expanded by this month had the pace continued over the course of an entire year.

The higher-than-forecast rate of growth apparently stemmed from the component known as inventory, which reflects the gross inventory accumulated in various sectors of the economy. This figure expanded by 2.8 billion shekels in the third quarter, without accounting for seasonal changes, versus a 1.4 billion shekel decrease in previous quarters. This is not a significant change compared to the economy’s total inventory, but it was enough to affect the growth figure.

The chief economist at the IBI investment house, Rafi Gozlan, said the 4.1% figure could make things look rosier than they actually are. “The growth component reflects a weaker picture. The increase in inventory played a central role in the third-quarter growth.”

The chief economist at the Meitav Dash investment house, Alex Zabjinsky, added, “There’s a pretty significant weakness in private consumption if you discount vehicle purchases, and drops in investments and exports. The main components of the economy are ultimately pretty weak.”

The investment in fixed assets (not counting the change in inventory) contracted by an annualized pace of 6.1%, after accounting for seasonal fluctuations, after dropping at a 4.7% pace in the second quarter.

An increase in inventory could be either good or bad, depending on the reason behind it. Under a good scenario, it could indicate that companies are making more goods, due to expectations of increasing demand. Under a bad scenario, it could indicate that they were too optimistic and produced more goods than they could sell.

The nation’s inventory is calculated by the Central Bureau of Statistics based on the inventory in sectors such as industry, diamonds and agriculture. It is influenced greatly by the inventory of gasoline, as well as by the inventory at startups, a figure that reflects the investments they receive from venture capitalists and other sources. If start-ups are acquired by foreign companies, they’re removed from the national inventory figure.

Thus, the third-quarter figure apparently reflects a relative decrease in exits by Israeli startups.

However, economists caution not to come to hasty conclusions about the state of the economy as a whole based on the figure for inventory, which could be heavily influenced by the timing of imports.

Another surprise in the figures published Sunday was public-sector consumption. Last week, the Finance Ministry forecast that public consumption would increase at a 0.8% annualized pace for the third quarter. Sunday’s figures showed a 4.2% rate of increase.

The Finance Ministry also forecast last week that exports had increased and imports had decreased in the third quarter, but Sunday’s figures revealed an increase in imports and a decrease in exports.