Defying Forecasts, Israel's Economy Grew a Sluggish 1.4% in First Quarter

But economists say the underlying figures like export growth continue to point to strong expansion

Bloomberg

Israel’s economy grew at a sluggish 1.4% annualized pace in the first quarter, the Central Bureau of Statistics said Tuesday, turning in a figure far below what economists and the government had expected after surging growth in previous quarters.

The rate was only a preliminary figure and could be raised, and some economists said it didn’t really reflect the pace of expansion. Still, the statistics bureau also revised the fourth-quarter growth rate sharply lower to a 4.7% annual pace from its original 6.3%.

A Reuters poll had forecast 3.7% growth for the first quarter.

“Not everyone was so sure that growth would reach the high levels the Bank of Israel was expecting, but a number as moderate as this one no one predicted either, not even the biggest pessimists,” said Shmuel Ben-Arieh, head of domestic markets at the investment house Pioneer Group.

The good news from the preliminary figure for gross domestic product was exports of goods and services, which showed an 8% annualized rise in the first quarter, extending a revised 7.6% gain in the final quarter of 2016.

That was especially encouraging because the Bank of Israel has been fighting a largely unsuccessful battle to prevent the shekel from strengthening further against the dollar, mainly by intervening in the foreign currency market. Governor Karnit Flug fears that a strong shekel will undermine Israel’s export competitiveness.

The greenback has lost more than 6% against the shekel since the start of the year and briefly fell below 3.60 Monday, in part because Israel’s economic fundamentals look so good. On Tuesday, with the release of the first-quarter GDP data, the dollar strengthened 0.2% to a Bank of Israel rate of 3.6060.

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Annualized change in per
capita consumer spending, %

But other news was less encouraging. Consumer spending, which had been driving economic growth in recent years, showed a 1.6% annualized decline and a 3.4% drop on a per capita basis. That extended a 1% drop in the fourth quarter.

“The most worrying figure is that the engine of economic growth over the past five years – consumer spending – simply froze in the last quarter,” Ben-Arieh said.

Israel’s surging fourth-quarter GDP growth had been boosted by extraordinary factors, notably a spike in sales of vehicles that occurred before a hike in the tax tied to a car’s carbon emissions at the start of 2017. Car imports plunged in the first quarter, which stung the headline GDP figure.

Excluding net taxes on imports – which eliminates much of the one-time auto tax effect – GDP grew an annualized 3.3% in the first quarter, the statistics bureau said.

“That’s the better number to look at,” said Bank Leumi Chief Economist Gil Bufman, noting that the auto tax issue had weighed on the private spending, investment and import components. “The 1.4% [headline number] is quite misleading. The economy did better than that.”

Ofer Klein, head economics and research at Harel Insurance & Finance, said the figures on exports as well as imports, which fell at an 8.9% annual rate in the first quarter, explained why the shekel has been gaining in recent months.

“If those trends continue they will support [a strengthening] shekel against the currency basket moving forward,” Klein said. “Because the weakness in consumer spending and growth overall was largely due to the change in auto imports, we don’t see any change in the basic direction of the economy.”

Economists also noted that Finance Minster Moshe Kahlon’s Family Net program of tax cuts and other help for young working parents would likely boost consumer spending, too, later this year.

In the export category, industrial exports showed a modest 4.4% annualized increased. But service exports climbed 1.5%, and receipts from incoming tourism – which statisticians count as an export – jumped 15.8% amid a record number of arrivals this year.

Government spending rose in the quarter, but investment in fixed assets declined 6%, turning around from a 4.1% rise the previous quarter. Business sector GDP grew just 0.6%.

With reporting by Reuters