Treasury Again Warns: Beware of the ‘Car Bubble’

Cars in the port of Eilat. (Matanya Tausig/Flash90)

Israel’s economy continued to grow in January, after posting 6.2 percent growth in the fourth quarter of 2016, and a 4 percent growth rate for all of 2016. Considering that many advanced economies were growing at rates much more modest, the Finance Ministry has been investigating just where Israel’s growth has been coming from. In a new report, it has narrowed down the two factors it says are responsible for much of the growth: the $6 billion refurbishing of Intel’s Kiryat Gat plant — and new car sales.

This isn’t the first time the Ministry has warned against putting too much stock in growth figures based on what it has called the “car bubble.” In 2016, the number of car imports into Israel broke all previous records. The import of cars is representative, and the most important component, of the consumer spending boom that has fueled the growth of the economy in recent months.

Consumer spending alone raised Israel’s GDP by 3.7 percent, while investments contributed 2.7 percent, and the Ministry pointed to car sales as the chief engine of that consumer spending boom. While this has not been an Israel-only phenomenon, the Ministry said that Israelis needed to understand that there were only so many cars that consumers could purchase.

“An examination of the components of growth in 2016 raises concerns that the current level of growth is unsustainable,” the Ministry said, reiterating a previous statement. The acquisition of cars — which has been the main engine of consumer spending growth — has hit its apex, the statement said; and as it falls, the GDP could suffer. “There was a 70 percent fall in the import of cars in the third quarter of 2016,” it added. “Clearly this contribution to the economy is not sustainable.”