Israel's Growth Slows Unexpectedly as Car Purchases Decline

  • First-quarter GDP growth 1.4%, prior revised down to 4.7%
  • Weaker data could give central bank room to keep rates on hold

Israel’s economy slowed unexpectedly in the first quarter, growing 1.4 percent, as purchases of cars declined and business investment dropped.

The economy was expected to grow 3.7 percent for the quarter, according to the median estimate of seven economist forecasts compiled by Bloomberg. Gross domestic product growth slowed from 4.7 percent in the fourth quarter, which was revised downward from 6.3 percent, the Central Bureau of Statistics said on Tuesday.

The weaker data means the Bank of Israel may have room to keep rates at a record low for longer to weaken the shekel and boost inflation. The central bank has been warning that gains in the shekel, which is trading near record highs against a basket of currencies, were being fueled partly by one-time items that led to exceptional growth in the last quarter.

Gross fixed capital formation fell 5.6 percent, with industrial investment dropping 11 percent in the quarter. Exports continued to recover, rising 11 percent for the quarter. Imports of goods and services fell 8.9 percent while private consumption dropped 1.6 percent, mainly due to a sharp drop in car imports after a year of above-average car consumption.

Trend Unchanged

“Due to the fact that much of the drop in consumption and growth comes from a change in trend in car imports, we don’t see a significant change in the basic trend of expansion of economic activity,” said Ofer Klein, head of economics and research at Harel Insurance & Financial Services Ltd. Klein said the low growth figures should be supportive of longer-dated government bonds.

Bonds maturing in 2017 rose, sending yields 4 basis points lower to 2.14 percent. The shekel pared gains after the data and was little changed on the day, after trading up 0.3 percent against the dollar earlier.

The central bank recently changed its forward guidance to say that it will raise rates only when inflation is firmly “entrenched” within its target range of 1 percent to 3 percent. Inflation in April rose less than economists anticipated, giving the Bank of Israel further reason to stay on hold.

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