Economic growth revised downward

Fed leaves interest rate unchanged.

Shekel money bills (photo credit: REUTERS)
Shekel money bills
(photo credit: REUTERS)
Israel’s economic growth in the second quarter of 2015 was even lower than feared, the Central Bureau of Statistics confirmed Thursday when it revised its preliminary data downward to 0.1 percent GDP growth from 0.3%.
The Finance Ministry also reduced its annual growth estimates for the next two years, but the fear that the US Federal Reserve Bank would increase interest rates on Thursday proved unfounded.
Many economists hoped new data incorporated into the revision would show higher growth than the near-zero level reported in mid-August.
The growth figures were dragged down by a sharp drop in exports and investments.
Thursday’s export figures were revised upward slightly to an 11.9% drop from the original 12.5% drop, while private consumption grew at 0.6%, down from the earlier estimate of 0.9%.
In early September, Finance Minister Moshe Kahlon moved to slash taxes, approving a one percentage- point reduction in value-added tax to 17%, and a significant reduction in taxes on alcohol ahead of Rosh Hashana.
The Finance Ministry on Thursday revised its growth projections for 2015 and 2016 downward, to 2.6% and 2.9%, respectively. Yet despite the increasingly gloomy forecast, the ministry maintained a rosy outlook on its revenues for both years, and maintained that it would have no trouble hitting the deficit targets for both years, set at 2.9% of GDP.
Labor MK Shelly Yacimovich said the economy’s poor performance was the result of Netanyahu’s policies, and that his coalition partners were not doing anything to help.
“Worst of all is that even in the new budget, there is not one shred of a response to the economic slowdown and the cost of living,” she said.
But Manufacturers Association of Israel president Shraga Brosh praised the government for starting to act on the economy, which he said is stagnant.
“Fortunately, the new government is aware of this tough problem, and the finance minister recently announced the creation of a new program that would strengthen local industry and aid investment and export,” he said. The Bank of Israel was also working to keep the exchange rate from becoming too unfavorable for exports, he added.
In related news, the Federal Reserve kept the federal funds rate between 0 and 0.25% Thursday, despite speculation that it might raise the rate for the first time in over six years. Relatively strong job and economic figures in the US had swelled expectations that the rate would rise in September, but a stock market crash in China and related corrections in the US and Europe, as well as snail-paced growth in Europe and serious moderations in emerging markets, tempered such expectations.
“Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term,” the Federal Open Market Committee wrote in its release.
While moving to increase the rate would be a positive sign, indicating that the board views the US economy as growing healthily, it would also end an unprecedented period of cheap money. Fears of a rate increase have sent stocks stumbling, and economists are unsure how the unwinding of several years of unconventional monetary policy will play out.
The Fed may yet raise rates following its December or March meetings.
Back in Israel, the combination of lower growth figures and the Fed decision could add pressure on the Bank of Israel to further reduce its own interest rate. The bank’s leadership has flirted with its own unconventional policy, such as negative interest rates and quantitative easing.