Photographer: Ahikam Seri/Bloomberg

Israeli Growth Surpasses Expectations as Consumption Soars

  • April-June growth rose to 3.7% from 2.2% in previous quarter
  • Exports grew as private consumption soared 9.5% in 2nd quarter

Israel’s economy grew much faster than expected in the second quarter as consumption soared and exports recovered, backing up the Bank of Israel’s reluctance to stimulate output with unconventional means.

Gross domestic product expanded at an annualized rate of 3.7 percent in the April-June period, compared with a revised 2.2 percent in the previous three months, the Central Bureau of Statistics said Tuesday. Exports of goods and services rose 3.8 percent, while private consumption jumped 9.5 percent. The median estimate in a Bloomberg survey had been for 2.1 percent growth.

The shekel extended the day’s gains following the data, reaching its strongest level since May 13. The currency was at 3.7762 against the dollar as of 2:11 p.m. in Tel Aviv.

“The trends are a bit better than we expected, with a very tight labor market boosting consumption,” Alex Zabezhinsky, chief economist at Meitav DS Investments Ltd., said by phone. “On the export side, I think it’s probably the service sector showing improvement, not necessarily goods.”

Policy Options

The stronger growth further reduces the chance of a cut in benchmark interest rates or the use of unconventional policy tools. Annual inflation has been negative for 23 straight months but the Bank of Israel has been reluctant to lower borrowing costs from 0.1 percent, in part because Israel’s economy hasn’t been doing badly relative to other developed nations. Inflation expectations have been steadily recovering, with prices falling slightly less than economists expected in July.

Sluggish global demand and the strength of the shekel had been hurting overseas sales, which account for about a third of the $300 billion economy. The recovery in exports this quarter compares with a 5.3 percent decline last quarter. The central bank said in June it expects the economy to grow 2.4 percent this year and 2.9 percent in 2017.

Higher wages driven by full employment have been fueling consumption, and the second-quarter figures show that trend is strong. Consumption may even be over-heating, with consumers taking out cheap loans to purchase cars with no down payments, Zabezhinsky said.

Investment in fixed assets, a key barometer of business optimism, rose 4.1 percent -- likely driven by Intel’s multibillion-dollar upgrade of its plant in southern Israel, according to Zabezhinsky.

Budget Debate

To further stimulate investment-driven growth, Finance Minister Moshe Kahlon is promoting corporate and household income tax cuts as well as deregulation of the business sector. He’s taking advantage of tax receipts that have surged above expectations due to consumption and apartment purchases. 

At the same time, the proposed national budget for the next two years would boost spending and relax deficit targets. The Bank of Israel has been critical of the plan, saying the government’s debt burden is liable to grow, especially if tax receipts happen to drop.

Before it's here, it's on the Bloomberg Terminal.