Israel's GDP Grew Unexpectedly Fast 4.2% in Quarter as Auto Imports Surged

Consumer spending and investment grew at double digit rates, says CBS

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Charles Krupa/אי־פי

Israel’s economy marked another unusually strong quarter of growth in the first three months of the year as consumer spending, imports and investment soared.

Gross domestic product grew an annualized 4.2% rate in the January-March period, the Central Bureau of Statistics reported on Wednesday in a preliminary estimate. That was well ahead of the 3.9% average pace forecast in a Reuters poll of economists and marked the third straight quarter of expansion in excess of 4%.

Moreover, the CBS revised up its fourth-quarter gross domestic product growth estimate to an annualized 4.4% from 4.1%. Growth was 4.3 percent in the third quarter. The Bank of Israel forecasts economic growth of 3.4 percent in 2018.

Imports of consumer durables – namely automobiles – nearly doubled, producing a windfall of tax revenues that are counted as part of gross domestic product. Without those tax revenues, the pace of GDP growth would have been a much more modest 2.9%, the CBS said.

The increase in vehicle imports also turned up in a sharp rise in consumer spending, which rose at a 10% annual pace in the quarter, the CBS said. Likewise, they were manifested in investment in machinery and equipment, which climbed at a 4.2% pace in the quarter.

The figures show sustained growth that aroused concerns that Israel is reaching full capacity. The unemployment rate fell to a seasonally adjusted 3.6% in March even as the proportion of working-age Israelis in the labor market has grown.

Nevertheless, inflation concerns remain constrained. The CBS on Tuesday reported inflation of 0.4% in April, but that left the annual rate of well below the target range of 1-3% that would prompt the Bank of Israel to raise interest rates for the first time in years. In the 12 months through April, the CPI rose just 0.4%.

“Stable real estate prices together with steps the government is taking to lower the cost of living are expected to keep inflation low in the coming months,” said the investment house Halman Aldubi said in response to the CPI figures. “Israel interest rates are expected to remain low many more months.”

Bank of Israel economists expect a 15 basis-point increase to 0.25% only in late 2018. However, at the last two rate decisions, one monetary policy member voted for a hike, arguing that the low inflation level did not reflect a problem with demand.

Exports of goods and services, which account for close to a third of Israel’s economic activity, rose at 7.2% annual pace in the first quarter. The figure, however, was slower than the 10%-plus increases during the previous two quarters. Excluding exports of diamond and startup companies, however, exports were up at an 11.4% pace.

Investment in fixed assets rose at a 20.3% pace, the CBS said. However, while capital spending in industry ballooned at a 43.2% pace, investment in residential building was down 15.4%, the fourth straight quarter of declines.

That spelled bad news for Finance Minister Moshe Kahlon. On Tuesday he was celebrating the first year-on-year decline in housing prices, an 0.1% drop in February-March compared with the same time in 2017. But as the figure on residential construction investment showed, housing starts have been in decline for some time and threatening to create new supply constraints and higher prices.

With reporting from Reuters.