Israel GDP Q1 2021

Israel: GDP records sharpest contraction since Q2 2020 in Q1

The economy contracted 6.5% in seasonally-adjusted annualized terms (SAAR) in the first quarter, contrasting the fourth quarter’s 6.3% increase. Q1’s reading marked the sharpest downturn since Q2 2020, although the contraction was accentuated by the distortionary effect of net taxes on imports.

Private consumption fell 3.2% in the first quarter, which contrasted the fourth quarter’s 17.7% expansion. The deterioration was driven partly by the third lockdown, but also by falling car sales following a frontloading of purchases in Q4 ahead of January’s vehicle tax hike. Public spending deteriorated, contracting 24.0% in Q1 (Q4 2020: +26.5% SAAR). Fixed investment contracted 14.2% in Q1, marking the worst reading since Q2 2020 (Q4 2020: +66.7% SAAR).

On the external front, exports of goods and services bounced back, growing 13.0% in Q1 (Q4 2020: -3.3% SAAR). Conversely, imports of goods and services growth softened to 9.6% in Q1 (Q4 2020: +87.4% SAAR).

On an annual basis, GDP fell 1.2% in Q1, up from the previous period’s 1.5% fall. Q1’s reading marked the smallest drop since Q1 2020.

Looking ahead, activity should gain substantial steam from Q2, as restrictions have now been lifted thanks to the world-beating vaccine rollout. Moreover, exports should benefit from stimulus measures and economic reopening abroad. However, the Israeli-Palestinian conflict will likely dampen momentum somewhat in the near term through its impact on consumer confidence and visitor arrivals, while new strains of the virus pose a downside risk.

On the Q1 reading and outlook, analysts at Goldman Sachs commented:

“While the data are clearly weak, we would downplay the release’s significance for three reasons: first, quarterly GDP growth in Israel tends to be volatile even in ‘normal’ times, with large surprises and revisions […]; second, there are distortions to the data from car imports; third (and most importantly), it is difficult to reconcile the weakness of the GDP data with the relative strength of other activity indicators […]. Looking forward, the exceptional weakness of Q1 GDP provides a reason to expect a positive offset in Q2 GDP data, adding to the momentum created by Israel’s successful vaccine rollout. However, set against this, the recent conflict in the region is likely to have a dampening impact on activity in Q2 and Q3, and we mechanically revise our full-year growth forecast from +7.5%yoy to +4.0%yoy in light of today’s data.”

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