Israel economy shrinks for first time in more than 5 years

Growth for all of 2014 is projected at 2.2 percent, with Israel's 50-day war in July and August having shaved off about half a percentage point.

Finance Minister Yair Lapid (photo credit: MARC ISRAEL SELLEM/THE JERUSALEM POST)
Finance Minister Yair Lapid
Israel’s economy shrank an annualized, seasonally adjusted 0.4 percent in the third quarter of the year, according to Central Bureau of Statistics data released on Sunday.
The economic pullback reflects financial damage from Operation Protective Edge against Hamas in the Gaza Strip, which raged through more than half the period covered in the data. It was the first quarterly decline in the nation’s GDP since 2009 during the global financial crisis.
The 50-day war, which saw a steady stream of Hamas rockets fired at Israeli communities, came as the economy was already slowing On Sunday, the estimate for second-quarter growth, which had been registered at an anemic 1.7% annual rate, was revised upward to 2.2%, and first-quarter growth was revised up from 2.5% to 3.2%.
The war badly hurt incoming tourism. Israel was set to have a record year in tourism, but is now projected to register a 7% drop in foreign tourists.
In October, for example, 19% fewer visitors came to Israel in comparison with the same month the previous year.
According to the CBS, the GDP drop reflected a decline in fixed capital formation, but both private spending and government spending increased.
The Finance Ministry said the damage from the campaign was not expected to be long-term, and that it still expects economic growth of 2.4% this year and 2.8% next year.
In its November interest rate discussion, the Bank of Israel Monetary Committee anticipated a drop in third-quarter activity, but concluded that “most of the slowdown in activity derives from Operation Protective Edge.”
The central bank has pursued an aggressive monetary policy in recent months, leaving the interest rate at a record low of 0.25% in an attempt to spur economic growth, keep the shekel from strengthening, and return inflation to its target.
On Friday, CBS figures showed that the average inflation rate over the past year had fallen for the second month in a row, though the monthly inflation rate was just barely above zero, at 0.3%.
The bank’s target for inflation is between 1% and 3% for the year.
BoI Gov. Karnit Flug has said the bank would consider “other tools,” a possible reference to quantitative easing policies of the sort employed by the US Federal Reserve for six years following the financial crisis.
The next interest rate decision is due next Monday.
Given the fighting and the slowdown in construction starts, the negative growth was no surprise, according to Ofer Klein, head of the economics and research division at Harel Finance. In fact, he noted there was also positive news in the data.
“Despite the weak figures, as expected, the previous quarters were adjusted upward, and the makeup of growth in the third quarter surprised us for the better,” he said. Though fixed capital formation and investment in residential buildings continued to fall, consumer demand looked healthy, as did trade in goods and services.
The latter would be boosted by the shekel’s weakening after a stubborn strong-streak that hit exporters, he said.
Opposition leader MK Isaac Herzog (Labor) blamed Prime Minister Benjamin Netanyahu for the economic contraction.
“Today, it became clear that the same economic growth he sold to the Israeli public for a long time does not exist,” Herzog said. “Netanyahu’s economic method is a colossal failure that hurts the vast majority of Israel’s citizens.”
His party colleague MK Shelly Yacimovich went a step further, saying that the economic news could not be blamed on the war alone.
“For more than a year there has already been a trend of moderation in the economy and the current budget will only worsen the trend,” she said, referring to Finance Minister Yair Lapid’s 2015 budget proposal making its way through the Knesset.
Lapid absorbed criticism from within the coalition as well.
Likud MK Yuval Steinitz, who preceded Lapid in the Finance portfolio, wrote in a Facebook post: It “hurt me to see how we’ve deteriorated in two years alone, from the first place in per capita growth and other parameters.”
If the trend continued, he warned, unemployment would rise and all of Israel’s citizens could be hurt.