GDP Growth Slowed to Tepid 0.8% in the First Quarter

Economists: It’s premature to say if figures points to real slowdown, but export trend is worrisome.

Mixed denomination Shekel currency banknotes and coins sit on display in this arranged photograph at Israel's central bank in Jerusalem, Israel, on Monday, Aug. 19, 2013.
Ariel Jerozolimski, Bloomberg

The Israeli economy expanded by a tepid 0.8% annualized rate in the first quarter, the government reported on Monday, but economists said it was too early to say that the sluggish pace presaged a longer-term drop in growth.

“There are many things that actually point to the slow first-quarter growth as temporary and that in coming quarters we can expect a return to the rate that’s characterized recent years,” said Guy Yehuda, senior economist at Psagot Investment House.

He said that Israeli exports continued to do poorly, but noted that they are concentrated in just a few companies, namely Teva Pharmaceuticals, Intel and Israel Chemicals. “The weakness has been expressed mainly in these companies, so that the story here is more micro than a macro story about the whole economy,” Yehuda said.

The first-data rate of growth for gross domestic product marked a sharp slowing from a 3.1% pace in the fourth quarter of 2015 and 2.3% in the third quarter. But even in years like 2014, when, GDP climbed 5.8%, and 2012, when it rose 5%, quarterly performance was highly variable and slipped below 1%.

Economists’ chief concern is that the economy is too reliant on consumer spending, while traditional drivers of growth like exports, investment and industrial production remain weak.

The Central Bureau of Statistics said on Monday the economy grew at a 4% rate in the first quarter, slowing only moderately from 5.4% in the previous quarter. Likewise, investment increased at a 7.5% rate, led by an 8.9% annualized increase in investment in residential construction and an 8.4% increase in spending on intellectual property.

However the CBS said that investment in machinery and equipment fell at a 3.4% rate and investment in non-residential construction was unchanged.

Israel’s export performance, meanwhile, showed a sharp deterioration. Exports of goods and services dropped at a 12.9% annual rate in the three months, extending a decline of 1.6% in the final quarter of last year. Industrial exports were down at a 12.2% rate and service exports down at a 1.42%, even though receipts from tourism (which are measured as an exported service) rose at a 34.1% rate.

Business sector GDP, which doesn’t include government services, declined at a 0.4% rate in the quarter, the CBS said.

Shmuel Ben-Aryeh, investments director at Pioneer Group, said the government needed to act to revive growth.

“It seems like economic policymakers have been asleep at the watch. At a time when the world economy is weakening and continues to tread water, in Israel no one is taking any steps to encourage growth,” he said.

Finance Minister Moshe Kahlon has focused his attention on reducing housing prices and introducing more competition into banking, while Prime Minister Benjamin Netanyahu is preoccupied with security issues and talks aimed at widening his coalition.

“The Bank of Israel, which has been watching exports disappearing, prefers to take a passive stance. Another interest rate drop won’t help. They need to find creative solutions not to lose the global currency war,” Ben-Aryeh said.

Israel’s base lending rate has been at a record low 0.1% for many months and while the central bank has stepped up intervention in the foreign currency market, the shekel has been strengthening. Monday’s news, however, helped drive the shekel lower.

The Israeli currency’s representative rate was set at 3.8120 to the dollar, a decline of more than 1.1%. Against the euro, it lost 0.8% to 4.3145.

“It’s been some time that the Israeli economy has been moving in a dangerous direction,” said Shraga Brosh, president of the Manufacturers Association trade group. “The last year and a half, exports have fallen 12.5%, something that should be setting off a warning light about the deterioration of the economy.”