Local economy surges on exports as deflation ends

Israel’s economy shot up in the final three months of 2016 and looks set to have grown annually by 4%, easily outstripping the Bank of Israel’s expectations.

It came on the back of robust exports and increased consumer spending.

On an annualized basis, gross domestic product soared 6.2% in the fourth quarter, the Central Bureau of Statistics reported on Thursday, as it also revised up the annualized third-quarter 2016 growth estimate to 4.2% from 3.6%.

Growth for the whole year should now be 4.0%, the statistics bureau said, up from its previous 3.8% estimate and well ahead of the central bank’s projection for 3.5%, itself a December upgrade from just 2.8%.

Combined with higher-than-expected inflation data on Wednesday, the strong economic growth numbers could push the Bank of Israel to raise interest rates at a faster pace than it currently foresees.

The central bank’s own economists forecast a 15-basispoint rise in the benchmark rate, currently 0.1%, and another quarter-point rise in 2018.

But one policy maker, according to minutes of rate discussions, believes that total – 40 basis points – over the next two years is lower than what will actually come.

Last week, Bank of Israel Governor Karnit Flug said of the bank’s rates estimate: “It’s a forecast. Not a commitment”

The year had started off very weak, with a preliminary first-quarter 2016 estimate at just 0.8%, leading the central bank and others to trim their full-year forecasts to 2.4%. But the data were revised up sharply as exports rose and the economy grew strongly the rest of the year.

Private consumption rose 3.5% in the fourth quarter, up from 3.1% growth in the third quarter. Exports, which account for more than 30% of economic activity, gained 11.2% after a slight decline in the prior quarter.

Government expenditure increased 2.3%, while investment in fixed assets, led by residential building, increased 7.4% in the quarter.

Excluding public-sector spending, the economy grew an annualized 7.8% in the fourth quarter.

The GDP data follows the first sight of inflation since 2014.

Israel’s annual inflation rate moved to 0.1% in January after 28 months of falling prices, although the rate remains below the government’s 1%-3% target range.

The central bank expects inflation, which has been held down mainly by low energy costs, to reach 1% by the end of 2017. (Reuters)