After Tepid First Half, Israel's Economic Growth Surges in Third Quarter

But the 4.1-percent annualized growth rate was led by consumer spending, which economists say isn't sustainable

Employees take a break outside the entrance to the Tel Aviv Stock Exchange, August 4, 2016.
Rina Castelnuovo/Bloomberg

Israel’s economy grew at a preliminary annualized rate of 4.1% in the third quarter, the Central Bureau of Statistics reported Thursday, surprising forecasters by suddenly accelerating after a sluggish first half.

Consumer spending — which has been the growth engine for some time, confounding economists’ expectations — grew at an annual rate of 7.8%, the bureau said. That marked its strongest quarterly gain since the second quarter of last year.

On a per capita basis, consumer spending rose at a rate of 5.7% in the third quarter, hastening from 4.2% in the second and a decline of 1.5% in the first. After a surge of car-buying a year ago, Israelis seemed to have moved on to other kinds of durable goods. Spending on items like refrigerators and other home appliances jumped at a 12.7% rate in the three months.

Investment, meanwhile, rose at a pace of 8.1% , slowing from an 11.1% surge the previous quarter. Capital spending paced the gain, jumping 13.2% for its second double-digit quarterly gain in a row, led by big increases in spending on machinery equipment in factories and in vehicles.

Investment in residential construction, however, declined at a 1.4% rate.

Economists had expected the economy to maintain the same 4% annual growth rate it had in 2016. But in the first six months GDP expanded at an anemic 2.2% rate, which caused economists to revise their forecast for the year lower. Last month, the Bank of Israel trimmed its 2017 economic growth estimate to 3.1% from 3.4%.

Growth in the third quarter was faster than the average forecast of 2.5% in a Reuters poll of economists, but the CBS figures released on Thursday are preliminary and may be revised sharply in subsequent reports.

Whether Israel can sustain high economic growth rates is central to the debate about when Finance Minister Moshe Kahlon will be able to afford to cut taxes. Many economists hold that high growth, and the surge in tax revenues it has created, will eventually wind down. But other, like Prof. Avi Simhon, chairman of the National Economic Council, argue otherwise.

“We’re not in a boom, we’re simply in a period of average long-term growth. If we act correctly, we’ll continue to see growth at the rates we’ve seen in recent years,” he said this week.

Nevertheless, many analysts are concerned about the way the economy is growing. Declining investment in housing spells bad news from Kahlon’s drive to lower housing prices, which requires the supply of new homes to keep pace with demand.

Consumer spending can’t continue to grow at a brisk pace indefinitely and something else — traditionally it’s been exports — will have to take its place as a growth engine.

In fact, the bureau reported that exports of goods and services, which account for nearly a third of the economy, surged higher at an 18.5% annualized rate after a decline in the prior three months.

But the gain was thus due almost entirely to sales of startup companies. Industrial exports (not counting polished diamonds) fell at a 6% rate, polished diamond exports slumped 16.5% and services grew by only 5.9%. The bureau said that export growth, excluding startup companies and diamonds grew at just a 0.4% annual rate.

Imports rose 16.6%, while government spending slipped 1.6%.

The bureau revised up its second-quarter gross domestic product growth estimate to an annualized 2.5% from 2.4%.