Bottom line: There were no surprises in the latest batch of data and estimates from the Central Bureau of Statistics (CBS). The annualized rate of GDP growth for Q3 was reduced from 2.2% to 2%, and the full-year rate of growth to 3.3% from 3.4% in the previous estimate, published in October. The implication is that the CBS expects the fourth quarter to be much better than the third – an annual rate of growth of around 4%, apparently – but there is no indication as tohow much of the rebound in exports that has been reported in recent months has been taken into account.
- With regard to the main data, i.e. those that it is customary to relate to, I would highlight only one aspect, namely that investment in residential construction actually fell in 2013, by 1% — the first decline in at least five years. Although this relates to the amount of money spent, not actual square metres being built, it does not bode well for the housing market. If lack of supply is the problem there, things are not getting better.
Instead of churning through the percentage changes in the various components of GDP, which is what economists usually do and are expected to do, I would like to look at the raw data – the actual numbers, in current shekels before they have been ‘adjusted’ and deflated by the ‘implicit price deflator’ (a more sophisticated inflation measure than the CPI). Normally, one wouldn’t bother to relate to these data, but I think it‘s useful because it highlights the severe impact of the ongoing revaluation of the shekel, which is the main factor behind the weak performance of exports and, by extension, the declining trend in GDP growth.
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- First, it’s worth noting that in the fourth quarter of 2013, GDP in current prices has crossed the NIS1 trillion mark – an important and not insignificant milestone (see graph below).
- Now let’s look at some of the data in the area of private consumption expenditure:
- The big increase was in spending on durable goods – but this was concentrated entirely on buying cars and other vehicles. Spending on ‘electrical appliances and other equipment’ actually fell, from NIS 16.7bn in 2012 to NIS 16.26bn in 2013. Of this 2.6% fall, the amount of ‘stuff’ bought dropped by only 1%, with lower prices accounting for the remainder – which was the bulk of the decline.
- More dramatic is the data relating to ‘consumption of Israelis abroad’. Did fewer Israelis travel abroad last year? Not at all – but they spent fewer shekels. More accurately, they bought more – 8.6% more in quantity terms – but they spent NIS 111mn less than the previous year in doing so, or almost 1% less than in 2012. That was all thanks to the 8.8% implicit change in prices, stemming from the shekel’s rise in value against foreign currencies, especially the US dollar.
- As might be expected, foreigners’ spending in Israel also dropped – by NIS 900mn! (from NIS 21.26bn to NIS 20.36bn). But their situation was the opposite of that of Israeli tourists overseas. They bought almost 8% less stuff, but paid almost 4% more for what they bought.
- There are other examples of this phenomenon – for example, Israelis bought more shoes last year, but paid fewer shekels for them – but the point should be clear: revaluation is a drag on the economy, it makes foreign goods and services cheap and hence boosts purchases of imports and it makes Israeli goods and services expensive, hence hurting exports. Now we have hard numbers to show that the theory is true in practice as well.
- The official estimate of inflation reflects the impact of exchange rate movements very clearly: The overall change in the prices of goods and services in the economy was a rise of only 0.2% in 2013 – compared to 4.3% in 2012 and 2.7% in 2011. But this is the result of two opposing trends: prices of domestically-produced goods and services rose by 2.7%, while prices of imported goods and services fell by 6.8%.