Everybody's growing

GDP in Israel grew by an annualized 2.2% in the 3rd quarter of 2009. As the media reacted, this is an impressive performance: the second consecutive quarterly increase after two quarters of negative growth, an accelerated increase compared to the previous quarter (where growth was revised up from 0.8% to 1%), and overall, a clear sign of Israel's recovery from the recession. But perhaps the most important economic news is that most industrialized economies showed positive growth in the 3rd quarter. As Professor Stanley Fisher, Governor of the Bank of Israel, has stated frequently, revival of the economy will only be assured when the global economy begins to revive.

Israel did not experience the fastest 3rd quarter growth: GDP in Korea, Japan, the US, Germany and Italy grew faster. Israel is also not the only industrialized country with two consecutive quarters of renewed growth to its credit: the Japanese, German and French economies also began growing again in the 2nd quarter of 2009.

What is certain is that the recession in Israel was much shorter than in practically all other industrialized countries, which experienced 4-5 consecutive quarters of negative growth compared to Israel's two (the one exception was Korea, with only one quarter of declining GDP). The two main industrialized economies still showing negative growth in the 3rd quarter of 2009 are the UK and Spain: for both, this is the 6th consecutive quarter of declining GDP.

The impressive nature of Israel's 3rd quarter growth performance is also reflected in the developments in the main GDP components which increased rapidly: private consumption – by an annualized 8.9% (following an 8.1% increase in the previous quarter, fixed capital investment – by 23.2%, and exports of goods and services – by 21.8% (following a 14.6% jump in the previous quarter).

The 2.2% increase in total GDP seems limited compared to these sharp increases in GDP components. The explanation is the parallel steep increase in imports of goods and services in the 3rd quarter – by 61.9%. This increase in imports is in itself an indicator of recovery, in an economy as dependent as Israel is on imports as an ingredient of growth.

Other indicators of activity in October (such as the Purchasing Managers' Index) show growth continuing in the early part of the 4th quarter. But there are still some major sectors where the latest data point to a long way to go to return to pre-recession levels: one example is industrial production which in September 2009 (the latest month for which data are available) was still more than 8% lower than in mid-2008.

So however impressive 3rd quarter GDP data look, the consensus is that the revival, in Israel and elsewhere, is still very much in its initial stages. It could take a long time before we can conclude that the global economy is finally "out of the woods".

Posted on the I-Biz blog on 22 November 2009