Growth figures flatter to deceive

Avi Temkin

The exceptional second quarter GDP result does not reflect a real pick-up in the economy.

The second quarter of 2013 was a strange quarter, unusual in its apparent optimism. An annualized growth rate of over 5% is a sign of recovery, as though the scenario of a recession or slowdown were receding. The forecast was of GDP growth of 3%, or slightly less, if the effect of natural gas discoveries were discounted. A growth rate of over 5% should therefore indicate good things for the economy.

Any outburst of enthusiasm, especially by Minister of Finance Yair Lapid and Prime Minister Benjamin Netanyahu, needs to be much watered down. If we look at the first half of the year, and not just the second quarter, the picture is far less bright, with an annualized growth rate of 3.4%, only slightly above the forecasts, while some indicators, such as investment and exports, give a picture that is downright bleak. There was an annualized 6.5% drop in investment in fixed assets, and annualized growth of just 3.9% in exports. These are numbers more suited to the grim story characteristic of the past few months.

Moreover, optimism should diminish sharply when the factors behind the rapid growth in the second quarter are examined. According to the Central Bureau of Statistics, there was a sharp, 6.7% annualized jump in private consumption in the second quarter, and an annualized 8.3% jump in public consumption. It should be remembered that this was the quarter in which talk began about "painful cuts" and austerity measures that the government must take to meet its budget targets.

Such talk is reinforced by the fact that most of the rise in private consumption was due to a jump in consumption of durable goods, which strengthens the impression that purchases were brought forward. Therefore, it cannot be ruled out that part of the jump in public and private consumption actually reflects early purchases and a pick-up in programs before new budget restrictions kick in. It should also be remembered that some government plans, which were drawn up after the social protest of 2011, were reflected in government spending in early 2013, and can partly explain the unusual rise in public expenditure.

If these explanations reflect what actually happened, then we cannot expect any dramatic change compared with the Ministry of Finance and Bank of Israel's pessimistic forecasts. The information we have indicates a decline in consumer sentiment in the past few months, and renewed fiscal discipline by ministries. Since no recovery is expected in exports or investment, the result must be a return to the low growth projection of 3%, with all that that implies about the Israeli economy and the standard of living in the country.

Published by Globes [online], Israel business news - - on August 18, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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