Roundup: Israeli economy slows down as global turmoil takes toll on exports

A recent drop in Israel's economic growth has taken governmental agencies by surprise, but economists are still hoping the resilience of the Israeli market would lead to quick recovery.

Figures released earlier this month by the country's Central Bureau of Statistics revealed a year-on-year growth rate of 0.3 percent for the second quarter of 2015, well below the official forecast of 2.7 percent growth. That came after the economy recorded a weaker-than-expected annualized two percent growth in the first three months of 2015.

Analysts attributed the weak growth mainly to a 12.5-percent drop in exports, which accounts for about a third of Israel's export-oriented economy, and a decline in investments in fixed assets.

Israel has enjoyed one of the fastest growing economies among developed countries, but that has been changing over the past year, as the slow recovery of European and U.S. markets, which are Israel's main export markets, has been taking its toll on the local economy.

Israel's GDP was hit hard during last summer's Gaza war and has been expected to bounce back rapidly, but after a brief recovery in the last quarter of 2014, the GDP now dropped back to its wartime rates.

"Israel's GDP growth slowdown in the second quarter puts Israel in a position of inferiority when viewed in the context of international comparison, with lower growth than in most developed countries," Yoel Naveh, chief economist at the Finance Ministry, warned in his latest weekly review on Sunday.

Spain registered a second quarter growth rate of 4.1 percent, Greece 3.1 percent, the United States 2.4 percent, and the euro zone as a whole 1.3 percent, according to the review.

On Sunday, Finance Minister Moshe Kahlon expressed concerns over the slowing economy and pledged to take several steps to bolster exports.

"The figures showing a drop in growth worry me, both as minister of finance and as an Israeli," he said. "I intend to act to strengthen and develop industry in Israel, and make things easier for industrialists in places where regulation makes things difficult."

The president of the Manufacturers Association of Israel and the Export Institute, Shraga Brosh, said the main reason for the slowdown is the weakening industrial exports.

"Industry's growth engine has lost steam, and a dangerous downtrend in the establishment of new enterprises in Israel has emerged," said Brosh, noting that the number of new factories has been declining.

He called on the government to ease "the burden of regulation and bureaucracy" and encourage new investments in industry.

Domestic factors have been also affecting the economy, with political instability sending Israelis to snap elections in March, resulting in a narrow coalition headed by Benjamin Netanyahu that has yet to pass the state budget and spending plan for 2015-2016 in the parliament.

According to the chief economist at the Finance Ministry, the government's failure to approve the budget caused a steep drop in public consumption, as ministries were curbing their spending amidst uncertainty over their budgets.

Israel's central bank said that slower local growth, the slowdown in China and the uncertainty in global markets are top concerns for the Israeli economy.

The central bank has last cut its benchmark rate in February and its monetary policy committee decided Monday to leave it unchanged at 0.1 percent, defying expectations of some economists.

A stronger Israeli shekel would hurt exports, which, in turn, hurt the economy. Although the shekel was devaluating this week against the U.S. dollar and euro, hitting its lowest levels in six months, the central bank suggested it may further devalue its currency.

"The risks to attaining the inflation target, and to growth, have increased," the central bank's monetary committee said in a statement. "The Bank will examine the use of various tools to achieve its objectives of price stability, the encouragement of employment and growth, and support for the stability of the financial system," it added.

"The current picture is of slowdown, with forecast of further decline, depending on the foreign exchange rate and the government's steps," said Amir Ayal, chairman and chief strategist at Infinity Investment Group.

However, he added that the Israeli market is robust, with low unemployment rates, good infrastructure for innovations, and the newly founded natural gas fields are expected to drastically lower energy costs.

"So there's still a potential for high growth," he said. Endit