Central Bureau of Statistics sees Israeli economic growth at five-year low of 2%

Bank of Israel keeps interest rate at record-low of .25%.

Karnit Flug
Israel’s economic growth will fall to 2% in 2014, its lowest level in five years, the Central Bureau of Statistics said on Monday.
If accurate, it would be the first time since 2002 that Israel’s economic growth is lower than the OECD average, which is projected at 2.2% for the year.
The estimate was pulled down by falling exports, including a 3.2% drop in tourism and 9.5% drop in agricultural exports, and a drop in fixed capital investment.
The Bank of Israel’s monetary committee decided to keep the interest rate at a record low .25% for a second month. The staff forecast said the rate is expected to remain at that level through 2015. One reason is that inflation in the preceding 12-month period fell to zero, though it is expected to rise to 1.1% in the coming year.
Another reason is the country’s moderating economy, which had already begun to slow before the summer war with Gaza.
Unlike the CBS, the Bank of Israel forecast growth for the year at 2.3%, down from 2.9% in the last forecast. Growth for 2015 is still estimated at 3%.
“Partial data from the Companies Survey, as well as the Composite State of the Economy Index, tourist entries, and additional indicators point to the moderation continuing in the third quarter, most of which is attributed to the effects of Operation Protective Edge,” the monetary committee wrote in its decision.
On the upside, the low rate helped weaken the shekel, whose seemingly unstoppable strengthening had put pressure on Israel’s exporters.
In the past month, it depreciated by 1.6% against a basket of currencies. Housing prices, in the meantime, continued unabated growth, increasing 6.8% in the past 12 months.
The central bank took a jab at Finance Minister Yair Lapid’s 0% VAT policy, which it has vocally opposed.
“The number of transactions continues to decline, against the background of the uncertainty in the market, among other things regarding the plan for a zero VAT rate on new homes,” the committee wrote.
Lapid has been battling to push through the policy, unpopular with economists, in the 2015 budget. The BoI estimated that the deficit for 2014 would come out at 3.3% – above the 3% target – and rise to 3.4% in 2015, also above the 2.5% target set for that year.
Yet S&P, the credit ratings agency that reaffirmed Israel’s A+ rating on Friday, indicated that a one-time rise in the deficit is less worrisome than the security situation, presuming the deficit comes back down in the coming years.
“What we’re really more concerned about is how frequent are these conflicts are going to be, how intense are they going to be, can we expect a change on the horizon, are there other measures that are more cost effective that the government could be considering that in the long run can help public finances as an alternative to engaging in these military conflicts?” said S&P Sovereign Credit Analyst Elliot Hentov in an interview on TLV1 radio’s The Cost of Doing Business.