Trade Whiplash Hits Israel in Slowdown Worse Than All Forecasts

Tel Aviv

Photographer: Lia Yefimovic/picture alliance via Getty Images

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Global trade tensions took a toll on Israel’s $370 billion economy, chipping away at its exports and contributing to a slowdown last quarter that was worse than anybody had envisioned.

Gross domestic product rose 1% from the previous three months on an annualized basis, according to an initial estimate from the Central Bureau of Statistics on Sunday. That’s below a downwardly revised 4.7% gain in the first quarter and worse than every estimate in a Bloomberg survey of economists, whose median was for a 1.5% advance.

Growth Slowdown

Israel's economy expanded less than expected in the second quarter

Source: Central Bureau of Statistics

Although the trade war between the U.S. and China has ensnared nations across the globe, it’s the small and open economies that are especially vulnerable. Singapore last week cut its forecast for growth this year to almost zero.

Trade has accounted for about a third of Israel’s GDP, with its key exports ranging from pharmaceuticals to electronics. The U.S. and China were Israel’s biggest trade partners last year, according to data compiled by Bloomberg.

Read more: How the U.S.-China Trade War Got to This Point

In July, the Bank of Israel’s research department cut its GDP forecast slightly because of the decline in world trade. The export of goods and services, which surged 9.9% in the first three months of the year, slumped 2.8% last quarter.

The broader underperformance was skewed by a one-off spike in auto imports, spurred by a tax change, earlier in 2019 that boosted first-quarter growth to its highest level in three years. Weaker investment and private consumption also hobbled the economy.

Still, the outlook is far from dire, according to Meitav Dash Investments Ltd. chief economist Alex Zabezhinsky.

“The picture is not very bad,” he said. “It’s difficult to see some significant slowdown in the data but I think we will see it more in the second half of the year.”

The government is also confident that Israel won’t be swept up in the global turmoil. Prime Minister Benjamin Netanyahu’s top economic adviser, Avi Simhon, said Sunday that he didn’t “think we will be hurt by the trade war because it isn’t in our court.”

Here are some key data points:

  • Private consumption expenditure, a key driver of growth, decreased 1.3% in the second quarter
  • Investment dropped 3.1% in the quarter
  • Exports of goods and services were down 2.8%, while imports -- excluding ships, aircraft, diamonds and defense imports -- fell 2.5%. Overall imports grew 2% after a gain of 5.7% in the first quarter

The Bank of Israel’s research department has forecast that growth would slow and converge toward its potential of around 3% over the coming two years.

Poorer prospects for Israel could impact its currency. The shekel has been a global top performer this year, in part boosted by the country’s current-account surplus and strong economy, and any slowdown in GDP could weigh on its exchange rate.

There are also implications for the country’s central bank. While planning to raise interest rates gradually, it has concerns about deteriorating growth abroad.

Already the central bank’s governor, Amir Yaron, said late last month that the key rate wouldn’t rise for a while. A further slowdown, combined with decelerating inflation, could shift the outlook even more.

— With assistance by Harumi Ichikura, and Gwen Ackerman