Israel’s 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 percent, easily outstripping the central bank’s expectations.

It came on the back of robust exports, but also increased consumer spending.

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

Growth for the whole year should now be 4.0 percent, the bureau said, up from its previous 3.8 percent estimate and well ahead of the Bank of Israel projection for 3.5 percent, itself a December upgrade from just 2.8 percent.

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

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

But one policymaker, 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 percent – leading the central bank and others to trim their full year forecasts to 2.4 percent. But the data were revised up sharply as exports rose and the economy grew strongly the rest of the year.

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

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

Excluding public sector spending, the economy grew an annualized 7.8 percent in the quarter.

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

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

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