Latest Israeli Economic Figures Point to a Weaker Outlook

Consumer prices fell in March and economic growth too reliant on consumer spending in 4Q.

The Tel Aviv Stock Exchange.
Moti Milrod

Israel’s economy ended 2015 on a strong note thanks to robust consumer spending, but consumer prices extended their declines in March and economists are expressing concern about economic growth being sustainable.

The economy grew at an annualized rate of 3.8% in the fourth quarter of 2015, the Central Bureau of Statistics said Sunday in a revised estimate. That was its strongest pace of growth for the year, but down slightly from its previous estimate of 3.9%. It also revised third-quarter GDP growth down to an annualized 2.3% from 2.4%.

In all of 2015, Israel’s economy grew a tepid 2.5% and is forecast to show only a small pickup about 2.8% this year, according to Bank of Israel and Finance Ministry forecasts.

On Friday, the CBS said the consumer price index slid 0.2% last month, double the pace economists had been forecasting. The March decline brought the drop in the 12 months to 0.7% and only once in the last eight months has a monthly CPI been positive.

The March prices declines were particularly sharp for fresh produce, which fell 7.44%, pacing an 0.5% drop for all food prices, while energy prices were down, by 3.1%. Home prices continued to rise, with the housing price index up 0.4%. Without the upward pressure of home prices, the CPI would be down 1.4% in the first quarter of 2016, the CBS said.

Although fourth-quarter GDP growth was relatively strong, economists said they were concerned that it was too reliant on consumer spending, which surged at a 7.9% rate in the fourth quarter and 4.9% for all of 2015.

Exports, which are traditionally the economy’s growth engine, grew just 3.3% for the quarter

“The economy’s growth is standing on one leg — consumer spending,” said Alex Zabezhinsky, chief economist at brokerage Meitav Dash, although he noted that government spending is contributing as well with nearly 15% growth in the fourth quarter.

Consumer spending remained solid due to a strong labor market in which the jobless rate is 5.3%. But, said Zabezhinsky, exports would have a hard time recovering this year because of weak global growth and a stronger shekel that is hovering at a nine-month high versus the dollar. He said data point to a 15% fall so far in exports in the first quarter.

With prices falling and consumer spending strong, the Bank of Israel has been focusing its attentions on the exchange rate and weakening the Israeli currency.

“The Bank of Israel is bothered mainly by the strengthening shekel, which it will grapple with primarily by increased intervention in the foreign currency market,” said Guy Yehuda, senior economist at the Psagot investment house.

The central bank’s base lending rate of 0.1% won’t be rising anytime soon, he said. “Interest rates will only rise when inflation has actually reached to lower band of the government’s target range (of 1-3% annually, and that’s only expected to happen in the first half of next year,” Yehuda said.

The next rate decision is on Thursday. Policymakers have made it clear they prefer not to reduce the rate to zero or below. “The Bank of Israel is out of ammunition,” Zabezhinsky said.

Meanwhile, investment in fixed assets rose 10.9% in the last three months of 2015 although analysts say spending was more on vehicle than on manufacturing equipment. Consequently, economists said the odds were greater than Israel’s economy would fall short of its 2.8% growth forecast than exceeding it.