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Israel Q3 GDP Falls Sharply

James Boston
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www.finances.com

Israeli growth has taken a predictable hit in the third quarter according to the latest GDP number which is showing a rate of economic expansion of just 1.9%, this is clearly softer than the 2.9% experienced during the second quarter of the year and brings to an end a three quarter streak of increasing economic growth rates. Fiscal predictions for Israel remain strong, as evidenced by the recent reaffirmation of A1 credit ratings by both Moody’s and Standard & Poors, and it appears that the recent war is likely to only take a short term toll on the Israeli economy.

The targeted 2.5% budget deficit for example is probably going to be missed, projections are showing a deficit more in the region of 3.6% but even this is difficult to determine at this time as the 2015 budget due to be agreed next month has been postponed to early next year and clarity on the precise state of finances is not forthcoming. This is not to suggest any fundamental weakness in the Israeli economy, by all measures it is structurally robust and historic levels of R&D investment and educational spending have set it up well for on going growth. A weakening currency and a pick up in the US economy, Israel’s prime trading partner, will ensure economic activity quickly reverts to course.

The budgetary problems are most likely being driven by squabbling’s among the coalition government parties. Between foreign debt payments and public sector pay commitments 65% of the country’s budget is accounted for, this leaves only about a third for the authorities to work with in an effort to tackle the deficit issue. The problem is that the finance minister is resolute in sticking to his commitment not to raise taxes whereas certain coalition partners are keen not to miss the deficit target. A failure to agree a budget by March of next year will automatically prompt early elections in the country.

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