Israel has revised upwards its estimate of economic growth in 2015 to 2.6% from 2.3% previously, while fourth-quarter growth reached 3.3%. After annual growth remained unchanged from 2014 to 2015, we expect the pace of economic expansion to accelerate modestly to 3.1% despite continued global headwinds clouding the outlook.
IHS perspective | |
Significance | Israel's CBS has revised upwards its estimate of economic growth for 2015 to 2.6%, while fourth quarter growth came in at 3.3%. |
Implications | The upward revision does not fundamentally change our view of a modest, but resilient economic expansion, while consumer spending continues to be the key driver of economic growth as the export sector struggles. |
Outlook | Although external risks will continue to undermine the outlook, we expect growth to accelerate slightly to 3.1% in 2016 through a mild rebound in fixed investment and exports, while consumer sentiment should remain strong amid low inflation, a healthy labor market, and accommodative monetary policy. |
Israel's Central Bureau of Statistics (CBS) has revised the country's 2015 economic growth up to 2.6% in its first full estimate of fourth-quarter growth, after previously estimating last year's real GDP growth at 2.3%. Fourth-quarter growth itself rebounded to a 3.3% quarter-on-quarter (q/q) seasonally adjusted annualised rate (SAAR), after averaging 1.9% q/q SAAR through the first three quarters of 2015. Component growth proved quite volatile in the last quarter of 2015, as both government consumption and imports surged 14.5% q/q SAAR and 25.0% q/q SAAR, respectively. Government consumption may have surged after the Knesset (parliament) passed a more expansionary 2016 budget that included December 2015 and the fiscal balance outperformed expectations in 2015 due to higher-than-expected revenue. Consumers also came back in force, as private consumption of durables surged 52% q/q SAAR in the fourth quarter after falling for most of the year, with sales of appliances and personal transport vehicles jumping by double-digit growth rates.
Israel's real GDP and components | |||||||
Q/Q, SAAR, % change | Y/Y, % change | ||||||
Q4 2015 | Q3 2015 | Q2 2015 | Q1 2015 | Q4 2014 | Q3 2014 | 2015 | |
Real GDP | 3.3 | 2.5 | 0.4 | 2.8 | 5.8 | 0.7 | 2.6 |
Private consumption | 5.8 | 2.2 | 1.6 | 5.2 | 7.4 | 6.1 | 4.7 |
Govt. consumption | 14.5 | 3.6 | -0.4 | 1.1 | 1.1 | 6.1 | 3.0 |
Fixed Investment | 6.8 | -0.1 | -2.9 | -6.6 | 9.1 | 7.2 | -1.5 |
Exports | 7.6 | 3.6 | -5.4 | -8.1 | 1.8 | -2.8 | -2.4 |
Imports | 25.0 | 0.2 | -2.7 | 0.7 | -4.2 | 18.7 | 0.5 |
Source: Central Bureau of Statistics. | |||||||
Outlook and implications
Israel's economy is expanding well below its average pace of 3.9% over the past decade, when it proved resilient to various forms of domestic and global turmoil. In 2015, economic growth failed to accelerate past the subdued 2.6% growth rate in 2014. The export sector continued to struggle in 2015 and has averaged -0.4% growth in real terms over the last two years, while fixed investment also has stagnated. Private consumption has been the only reliable driver of growth as consumers benefit from accommodative monetary policy, a healthy labour market, and rising purchasing power due to deflationary price pressures and some wage growth. The fairly strong accumulation of inventory stocks in 2015 contributed to growth as well, though this implies some payback, or at least that slower accumulation will take place in 2016 and weigh on growth. All in all, the upward revision to growth does not fundamentally change our view for Israel of a modest but resilient economic expansion.
We expect economic growth to accelerate to 3.1% in 2016 and 3.5% in 2017. Consumer spending should remain a key driver of economic growth in 2016 as the low interest rate, low inflation, and low unemployment environment persists, though we expect private consumption growth to moderate after a robust 2015. Moreover, energy prices have continued to move lower through the early part of this year, and Israel's monetary climate is likely to prove expansionary for even longer given deflationary pressures and the possibility of further monetary stimulus in the Eurozone and the United States, with the US Federal Reserve in particular likely to at least delay previously anticipated rate hikes. Government consumption should accelerate through a more expansionary 2016 budget following the use of an interim budget for most of 2015.
Fixed investment should return to growth in 2016 through a strengthening housing sector as supply needs remain robust, while business investment should also rebound after a sluggish two-year stretch. On the downside, stronger import growth will absorb some of the recovery in investment. Exports should recover a bit as the sector benefits from healthy consumer sentiment in the US, strengthening demand in the Eurozone, and some positive base effects after a weak 2016 for both goods and services exports, though we expect export growth to remain mild overall. In addition, external risks continue to cloud and undermine the growth outlook, as still-weak demand in Europe, stuttering emerging market growth, and US growth stuck at around 2.5% will limit external demand for Israeli exports. Notably, IHS Economics lowered its US growth forecast for 2016 to 2.4% from 2.7%.