Israeli Economy Grows 2.3%, Reflecting Global Deceleration

(Bloomberg) -- Israel’s economy grew 2.3 percent in the third quarter of the year, far slower than the strong expansion seen in the second half of 2017 but more in line with its long-term potential, economists said.

The data came in below the median expectation for 3 percent growth in a Bloomberg survey, and the figures for previous quarters were revised downward. The data had little impact on the stock market, with the benchmark TA-35 Stock Index up 0.5 percent to 1643.15 as of 1:53 p.m. in Tel Aviv. The yield on the 10-year government bond was down 3 basis points to 2.07 percent.

The third-quarter expansion was driven by private consumption and a sharp increase in public spending, according to the Central Bureau of Statistics. Israel’s economy grew as much as 4.6 percent to start the year before slowing to 1.2 percent in the second quarter, its most tepid pace since early 2017.

“There’s no question growth is more moderate than what we saw a year ago,” reflecting global trends, said Rafi Gozlan, chief economist at Israel Brokerage and Investments Ltd. in Tel Aviv. “The second half of last year was exceptionally strong, and now we’re going back to something more consistent with global growth.”

Imports declined 5 percent in the quarter, while exports grew 0.9 percent. Fixed-asset investment was down 6.3 percent.

Inflation Returns

After years with little or no inflation, prices in Israel have begun to rise again, up 1.2 percent in October from the year before. That puts inflation within the Bank of Israel’s 1 percent to 3 percent target range.

The growth and price trends mean the central bank, which has held its benchmark rate at 0.1 percent since March 2015, may soon begin to tighten monetary policy. The BOI’s research department expects a rate increase to 0.25 percent early next year.

Alex Zabezhinsky, chief economist at Meitav Dash Investments Ltd., said slower growth reflects a cooling in Israel’s real-estate market and a slowdown in private credit. At the same time, high public spending has begun to stretch Israel’s budget deficit, likely beyond the 2.9 percent target for the year. That could limit the government’s room for stimulus if growth slows further.

“You have to take into account that the government deficit is high, so there’s no room for maneuver, no room to do something with fiscal policy, and interest rates are already about zero," Zabezhinsky said.

Guy Beit-Or, head of the macroeconomic department at Psagot Investment House Ltd., said natural-gas export -- expected to begin late next year -- should make up for any lull in the economy now.

“You have a gradual slowdown of the economy but it’s not worrisome, it’s pretty close to our potential growth,” he said. “We’re just talking about a temporary weakness.”

To contact the reporter on this story: Michael S. Arnold in Tel Aviv at marnold48@bloomberg.net

To contact the editors responsible for this story: Riad Hamade at rhamade@bloomberg.net, Gwen Ackerman, Mark Williams

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