It's Official (Almost): Israel's Economy Is Hitting a Wall

The Tel Aviv Stock Exchange may be buoyant at the moment, but new data in a key Bank of Israel index offers a more sobering perspective.

Bloomberg

The Bank of Israel offered up another signal yesterday that the economy is heading into a slowdown, with its State of the Economy index showing a second consecutive month of little or no change.

The central bank said the index edged up just 0.04% in April. For March it revised the index down to show no change, and likewise revised the January and February indices lower. The bank said the April S-index reflected drops in exports, imports of manufacturing inputs and in industrial production.

The only bright spot was a moderate increase in the number of job openings.

The stagnant index follows a sharp slowdown in economic growth in the first quarter to a 2.1% annual rate, according to preliminary estimates released last week by the Central Bureau of Statistics. It also comes after the CBS reported that April’s inflation was the lowest it had been in 11 years, and far lower than economists had forecast.

Both figures point to a sharp slowing in consumer spending.

The weak S-index figures come as the treasury begins work on the 2015 budget, whose parameters will be greatly influenced by officials’ forecast of estimated growth. It also came a day before the Bank of Israel is due to announce its decision on June interest rates.

A survey of investment advisers, taken by Psagot Investment House, found that about two-thirds expect the central bank to keep the lending rate at 0.75%, with the rest predicting a quarter point drop. Among economists surveyed by Bloomberg, 10 out of 18 forecast no change.

But economists said that doesn’t mean the Bank of Israel and its governor, Karnit Flug, are necessarily sanguine about the direction of Israel’s economy. The bank already trimmed the lending rate by 250 basis points over the past two years.

That has mostly been in a bid to restrain the shekel’s appreciation, but more recently a sluggish economy has been a factor. The problem now is that it has little room to cut the base rate further.

“The Bank of Israel will lower the interest rate in the next few months, although it isn’t at all clear that it will be [today],” said Uri Greenfeld, Psagot’s chief economist. “It is likely in light of the fact that the Bank of Israel has almost no monetary ammunition left to wait to see if the latest data will be revised a little higher before it cuts the rate again.”

The rally on the Tel Aviv Stock Exchange, which has been rising in recent weeks and passed the 1,400 points barrier for the first in more than a month yesterday, would seem to be pointing to a buoyant economy. But at least one market analyst pooh-poohed that idea.

“They say that stock markets run ahead of the economy and predict economic trends. That’s what they say. The rises we’ve seen in recent months certainly did not predict the low growth of just 2.1%. Analysts were forecasting growth of 3.5%, but consumer spending dropped 2% [in the first quarter],” said Erez Tzadok of Aviv Mutual Funds. “Welcome to the slowdown.”

The S-index itself was overhauled last January to make it a finer and more up-to-date barometer of the economy. The number of components was increased from 5-6 to ten.

In the new index, the biggest weighting is for job openings – which account for 23% of the index. In the first months of this year, the number of openings was lower than in January 2013, a figure suggesting that the economy is reaching full employment.

In fact, the jobless rate in Israel is just 6%, making it among the lowest in the West, even as the percentage of Israelis in the key work ages of 25-64 holding a job or actively seeking one has been growing. The S-index’s jobs subindex has been rising. The percentage of young university graduates is very low in Israel, making it virtually unique among Western economies.

But for the broader economy, the strong employment figures have not been accompanied by wage growth. Unsurprisingly, another component of the S-index – imports of consumer goods, which provides a good index for how consumers are faring – has been declining in recent months.

Measures of the economy’s key industrial sector are also sending bearish signals. Industrial production, a key growth driver for the economy, has been rising very slowly in recent months, while industrial employment has seen no growth at all, according to S-index data.

The subindex measuring imports of factor inputs, which gives another insight into manufacturing growth, has been volatile in recent years, but in 2014 has been rising slowly, if not declining some months.