Despite a slight quarter-on-quarter moderation, economic activity remained robust in the first quarter chiefly on the back of strong private consumption and fixed investment. The external sector, however, dragged on economic growth in Q1; import growth was more than three times higher than export growth. Available data for Q2 suggests that momentum will remain robust. Economic activity picked up pace in April, while business sentiment and the manufacturing PMI remained elevated despite easing somewhat. The PMI remained in expansionary territory for the fifth consecutive month in April on the back of domestic demand. In addition, export data for February–April continued to point towards strong overseas demand for high-tech goods. The economy should be supported by fixed investment and private consumption this year. New projects such as the Leviathan gas field and ultra-loose monetary policy should buttress fixed investment, while household consumption will likely benefit from lower taxes. However, risks remain present in regional tensions that could dampen inbound tourism and investor sentiment, and drag on export growth. Moreover, the near full-employment level could create skill shortages, limiting output growth. FocusEconomics panelists forecast the economy to expand 3.4% in 2018, unchanged from last month’s forecast, and 3.3% in 2019. Inflation increased from 0.2% in March to 0.4% in April. However, inflation remained below the Central Bank’s 1.0%–3.0% target. Going forward, inflation should rise gradually on strong domestic demand, improving inflation expectations and higher oil prices. FocusEconomics panelists expect inflation to average 0.7% in 2018, before averaging 1.3% in 2019
At its 28 May monetary policy meeting, the Bank of Israel (BoI) opted to keep its interest rate steady at 0.10%. The decision was taken within the context of subdued current and expected price pressures. The BoI will likely maintain its expansionary stance in the short term until inflation moves back to target; rates are not expected to rise significantly until H2 2019, with only two panelists forecasting a rate hike by the end of 2018. FocusEconomics panelists expect the interest rate to end 2018 at 0.14% and 2019 at 0.66%. On 1 June, the Israeli shekel (ILS) ended the day at 3.57 per USD, strengthening 1.4% from the same day in May. The shekel is likely to continue strengthening going forward, underpinned by the country’s current account surplus, strong economic growth and natural gas stocks. FocusEconomics Consensus Forecasts panelists expect the shekel to end the year at 3.48 ILS per USD. For 2019, the panel forecasts the shekel to end the year at 3.49 per USD.
REAL SECTOR | Economic growth remains robust in the first quarter of the year According to preliminary data released by the Central Bureau of Statistics (CBS) on 16 May, the Israeli economy grew a robust 4.2% quarter-on-quarter at a seasonally-adjusted annualized rate (SAAR). Although the result came in slightly below the prior quarter’s revised print of 4.4% (previously reported: +4.1% quarter-on-quarter SAAR), it was driven by a strong increase in domestic demand, while the external sector’s performance worsened. Private consumption growth quadrupled in the quarter, logging impressive 10.0% growth (Q4 2017: +2.5% qoq SAAR). The strong reading benefitted notably from a massive jump in durable goods consumption, while expenditure on semi-durable goods also rebounded in the quarter. Fixed investment recorded a noticeable turnaround, growing 20.3% and contrasting the -0.3% contraction witnessed in the prior quarter. This was due to stronger investment in industries, as investment in residential buildings contracted for the fourth consecutive quarter. Government expenditure growth, meanwhile, slowed marginally but remained strong (Q1 2018: +11.3% qoq SAAR; Q4 2017: +11.9% qoq SAAR). On the external front, export growth eased from a strong 10.3% increase in Q4 (previously reported: +9.9% qoq SAAR) to 7.2% in Q1. Imports expanded at a stronger pace, increasing 23.1%, which was up from the prior quarter’s 6.1% increase (previously reported: +2.5% qoq SAAR). On an annual basis, economic growth picked up considerable speed and reached 3.9%, up markedly from the prior quarter’s 3.0%. The BoI expects GDP to grow 3.4% this year and 3.5% next year. FocusEconomics Consensus Forecast panelists expect the economy to grow 3.4% in 2018, which is unchanged from last month’s forecast. For 2019, our panel expects 3.3% growth. REAL SECTOR | State of the Economy Index picks up in April on the back of greater manufacturing imports At the outset of the second quarter, economic activity in Israel picked up from the prior month, according to the Bank of Israel’s (BoI) Composite State of the Economy Index. The index rose 0.39% over the previous month in April, accelerating from March’s upwardly revised 0.33% expansion (previously reported: +0.28% month-on-month). The pick-up was driven by a rebound in the imports of manufacturing inputs. However, the acceleration was likely restrained by a drop in imports of consumer goods and a contraction in exports of goods. Data for March, meanwhile, showed strengthening retail trade and services sectors, as well as a rebound in industrial production. A year-on-year comparison showed that economic activity growth inched up to 3.7% from the prior month’s upwardly revised 3.6% (previously reported: +3.4% year-on-year). OUTLOOK | Consumer confidence drops at the start of Q2; business sentiment eases from three-month high all-time high in March According to data released by the Central Bureau of Statistics (CBS), consumer confidence dropped from minus 9.0 points in the prior month to minus 9.9 points in April. As a result, sentiment remained firmly entrenched in pessimistic territory, where it has been since the survey began in March 2011. The drop in consumer confidence came on the back of decreased optimism regarding labor market developments. While consumers’ view on the state of the Israeli economy was unchanged from the prior month, their view on the their own economic situations moderated strongly. The easing of households’ sentiment on their economic situations was likely linked to a more pessimistic view on the labor market, as consumers expected unemployment to increase. Despite the expected increase in joblessness, consumers became less pessimistic regarding savings. Business sentiment, in addition, moderated from the three-month high of 22.1 in March to 21.7 points in April. FocusEconomics Consensus Forecast panelists expect private consumption to grow 4.0% in 2018, which is up 0.2 percentage points from last month’s forecast. Our panel expects private consumption to grow 3.6% in 2019. Our panelists expect fixed investment to grow 6.3% in 2018, which is up 0.8 percentage points from last month’s forecast. For 2019, our panel expects fixed investment to grow 5.1%. MONETARY SECTOR | Inflation rises but remains below the Central Bank’s target range In April, consumer prices in Israel rose 0.4% over the prior month, slightly higher than March’s 0.3% month-on-month increase, according to the Central Bureau of Statistics. The pick-up in prices reflected higher prices for fresh vegetables and fruit, as well as for clothing and footwear. Inflation came in at 0.4%, above the prior month’s reading of 0.2%. The result matched market expectations and marked the eighth consecutive month of positives annual changes in consumer prices; however, inflation remained below the Central Bank’s 1.0%—3.0% target range. Furthermore, annual average inflation edged down from 0.2% in March to 0.1% in April. Lastly, core inflation—which excludes volatile energy prices—was stable at the prior month’s print of 0.2% in April. The BoI expects inflation to average 1.1% this year. FocusEconomics Consensus Forecast panelists expect inflation to average 0.7% in 2018, which is unchanged from last month’s forecast. For 2019, our panelists expect inflation to average 1.3%. MONETARY SECTOR | Bank of Israel holds the interest rate firm in May On 28 May, the Bank of Israel decided to keep the interest rate steady at its historic low of 0.10% amid subdued inflationary pressures. The decision was in line with market expectations. The interest rate has now remained unchanged for 34 consecutive monetary policy meetings; it was last cut in February 2015. The Bank’s outlook on inflation changed slightly in May. It highlighted inflationary pressures are rising on the back of accommodative monetary policy but remain well below the target range. Although inflation rose in April to 0.4%, adding to the string of higher inflation readings through the start of 2018, it has yet to come in reach of the Bank’s 1.0%–3.0% target range. Oneyear inflation expectations increased in May, but inflation is still projected tostay below the lower bound of the target range. Inflation in the second year is expected, however, to come within the target range. In the accompanying press release, the Bank reaffirmed its commitment to accommodative monetary policy amid subdued inflation. It also signaled that its accommodative stance would persist until inflation returns to within the target range. In April, bank officials reiterated expectations of a 15 basis-point rate hike in the fourth quarter of the year, which would bring the interest rate to 0.25%. That said, fewer than half of FocusEconomics panelists expect a first rate hike by the end of the year. The Bank’s next monetary policy meeting of the year is scheduled for 9 July. Expecting inflation to remain low this year, FocusEconomics Consensus Forecast panelists forecast the long-awaited tightening cycle to begin no earlier than the fourth quarter, at which point they expect inflation to have returned to within the Bank’s target range. That said, fewer than half of our panelists expect a first rate hike by the end of the year, with panelists currently seeing the interest rate ending 2018 at 0.14%. For 2019, our panelists see the interest rate ending the year at 0.66% as inflation moves within the Bank’s target range. EXTERNAL SECTOR | Trade deficit widens in April despite a jump in export growth Exports jumped 12.4% over the previous year in April, a rapid acceleration from the prior month’s revised 2.9% year-on-year expansion (previously reported: +1.6% year-on-year). Trend data for February–April continued to point towards robust growth in the exports of high technology industries, with especially robust foreign demand for computers, electronic and optical products, and medical supplies. Imports, however, also accelerated quickly in April and increased 26.0% from a year earlier, which was up from the prior month’s 17.9% yoy expansion. Data for February–April showed especially strong growth in imports of investment goods such as machinery and equipment, as well as of raw materials and consumer goods. The trade deficit widened from USD 1.7 billion in March to USD 2.2 billion in April, which was significantly larger than the USD 1.4 billion trade deficit recorded in the same month a year earlier. In addition, the 12-month rolling trade deficit widened from a revised USD 18.1 billion in March (previously reported: USD 18.2 billion) to USD 19.0 billion in April. FocusEconomics Consensus Forecast panelists expect exports to grow by 4.9% in 2018 and imports by 6.7%. Our panel expects a merchandise trade deficit of USD 11.2 billion in 2018. For 2019, our panel expects exports to expand by 5.3%, imports by 5.0% and the merchandise trade deficit to increase to USD 11.6 billion.
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