Economic growth slowed to 1.7% before Gaza conflict

The hostilities with Hamas in Gaza were estimated to lop an additional .5% off annual GDP growth.

Tel Aviv stock exchange (photo credit: REUTERS)
Tel Aviv stock exchange
(photo credit: REUTERS)
Israel’s economic growth slowed to an annualized 1.7 percent in the second quarter of 2014, even before hostilities with Gaza broke out. That figure is on par with population growth, meaning that on a per capita basis, the economy was frozen.
According to data released by the Central Bureau of Statistics on Sunday, the 1.7% annualized increase of Gross Domestic Product (GDP) from April to June showed a marked decline in growth from 2.5% the previous quarter and 2.8% before that. All in all, the economy grew at an annualized 2.5% in the first half of the year.
The main drag on the economy was a 17.7% annualized drop in service exports, and a 4.5% slump in fixed investment. Private consumption was up 3.1% and public spending also increased 4.2%.
As always, the CBS warned that the figures were preliminary, and could change as new data are incorporated.
“It’s important to emphasize that the monthly foreign trade data the CBS publishes does not support these drops, so it seems plausible to assume that this data will be updated upwards in their next estimates, as we have seen in previous quarters,” Harel Finance analyst Simi Barak said.
The lackluster economic showing follows a recent jump in the unemployment rate, which rose from 5.6% in April to 6.3% in June.
While the second quarter figures were disappointing, it is the third quarter data that will reflect the lion’s share of the cost of the war with Hamas in Gaza, which began in July and will lop another estimated 0.5% off annual GDP growth.
When set alongside turbulence in the European economy, which is Israel’s largest export market, the chances of hitting the roughly 3% predicted growth rate for the year are fairly minuscule. Finance Minister Yair Lapid and Prime Minister Binyamin Netanyahu insisted last year that the economy could be growing at 5% to 6% a year.
A slowing economy will have implications for upcoming budget talks. The Bank of Israel has urged a path of reduced deficits to ensure that Israel’s debt burden – and the hefty price of paying interest each year – will come down over time. To keep the debt shrinking, the country’s economic growth has to outpace its overspending.
The BOI had planned the 2015 budget to fall to 2.5% of GDP, but Lapid already announced that he expects to raise that target to 3%.
BOI’s head of macroeconomic policy, Adi Brander, told Calcalist on Sunday that even with a 3% target, the budget will still miss the mark by NIS 12 billion given the cost of the war, various expenditure increases already on the books, and reduced revenue.