Israeli GDP Expands Unexpectedly Fast in 2Nd and 3Rd Quarters

Economy grew a preliminary 3.2% rate in third quarter and at revised 4.9% in second.

shekels
Reuters

The Israeli economy posted unexpectedly strong growth in the third quarter as investment soared, the Central Bureau of Statistics reported Wednesday. But consumer spending growth slowed and exports slumped.

Gross domestic product expanded at a preliminary 3.2% annualized rate in the three months, a faster rate than the 3% economists had forecast. Moreover, the CBS revised its figures for second-quarter growth by a full 0.6 percentage points to 4.9%.

But behind the unexpectedly high growth figures, the economy’s performance was more mixed, said Ofer Klein, chief economist at Harel Insurance & Finance.

Growth in consumer spending, which has been the engine of economic growth in the last few years, slacked from a 2.9% annualized rate in the third quarter, down from 9.3% in the second quarter and its slowest in more than a year.

Exports, not counting polished diamonds and startup companies, fell at a 6.3% pace in the third quarter after briefly surging 11.3% high in the second quarter.

Gross domestic product Quarterly to quarter change, annualized

Meanwhile, investment in fixed assets, which includes everything from residential construction to purchases of machinery and equipment, rose at a 12.1% rate — the third quarter in the last four to post a double-digit increase — but Klein said he didn’t think the breakneck growth would continue.

“A large part of that, it appears, was a one-time occurrence due to the investments by Intel in its Kiryat Gat factory,” said Klein. The U.S. chip maker earlier this week inaugurated a $6 billion production line at the plant. Overall, investment in machinery and equipment in the quarter soared at a 13.5% annualized pace.

Investment in residential building, which Finance Minister Moshe Kahlon has been trying to encourage to stem the rise in housing prices, was up at a 9% annualized rate in the quarter, its fastest pace this year.

Although exports of goods and services were weak overall in the third quarter, exports of polished diamonds rose at a rate of 35.8% and tourism receipts, which are counted by statisticians as a service export, were ahead at a 25.7% pace.

“Exports, despite the revisions upward for previous quarters, are still a weak spot for the Israeli economy due to the strong shekel and slack world export markets,” Klein added. Nevertheless Harel revised its GDP growth forecasts for this year to 3.1% and to 3.3% in 2017.

Israel’s economy has been growing on the back on a surge in consumer spending as wages rise, interest remains at record lows and unemployment has fallen to its lowest rate in three decades. While it undermines the export competitiveness of Israeli companies, the strong shekel has kept prices for imported goods low, as have low energy prices.

Brisk growth, especially for consumer spending, has also filled the government’s coffers with tax money, reducing the deficit and enabling Kahlon to lower taxes. Last week, the credit rating agency Fitch Ratings raised Israel’s sovereign rating to A-plus from A.

Guy Yehuda, senior economist at Psagot Investment House, also raised his growth outlook for the economy yesterday, to 3%-3.5%.

“Exports shrunk 6.3% but the big story for sure is investment, which continues to expand quickly — 12.2% in the third quarter,” he said. “No doubt we’re seeing a real improvement in the rate of economic growth, an improvement we believe will continue into 2017 when we’ll see a further acceleration in economic activity with growth of 3.5%.”

The statistics bureau said imports of goods and services in the third quarter rose at a 5.8% annualized rate, slowing from a revised 21,.8% in the second quarter.

While consumer spending continued to rise in the third quarter, the Israeli shopping spree for consumer durables like washing machines and furniture took a sudden turn lower: After jumping an annualized 26.7% in the second quarter, it fell at an 18.7% rate in the third, statistics bureau figures showed.