Bottom line: The pace of economic expansion, as measured by the GDP data, fell to an annualized rate of 1.7% in the second quarter. The 2.5% rate of growth for the first half of 2014 reflects the relatively high rate of 2.8% recorded in January-March. However, whereas the first quarter data, which immediately looked to be inconsistent with the general picture of the economy for the period they covered — and were indeed revised upward in later estimates — the Q2 data are very plausible, and may even be adjusted downward. In any event they confirm that the economy was weakening before Operation Protective Edge and they set the scene for a much weaker — and possibly negative — third quarter.
The second quarter of 2014 saw GDP growth of less than 2%, and hence negative GDP per capita growth – for the first time since the first quarter of 2013.
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The weakness was driven by a sharp decline in exports — almost 18% annualized. For January-June, exports were almost unchanged compared to H2 2013 (see graph).
On the other hand, the strongest feature of the GDP data for the latest quarter was the annualized increase of 3.1% in private consumption — over double the rate in the first quarter. However, for January-June, private consumption rose at only a 2.1% pace, far less than in either half-year of 2013.
Government spending also rose — although defence spending lagged behind. Defence spending will surely jump in the coming quarters.
Investment – formally ‘gross fixed capital formation’ — fell at a rate of 4.5%, half the 9.5% rate posted in Q1. The rate of decline in investment in plant and equipment slowed, but the decline in residential construction was stronger than in January-March.
Imports also contracted in Q2 but, if defence imports and diamonds are excluded, they rose slightly. For January-June, imports were flat compared to H2 2013 (see graph).
The level of activity in April-June was boosted by growth in inventories. These will have to be used up and will weigh on the economy in the second half of the year.