Merchandise exports contract sharply in Q216

ISRAEL - In Brief 13 Jul 2016 by Jonathan Katz

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Industrial exports (trend data, excluding mining and quarrying in dollar terms) contracted 18.9% SAAR in Q2 following a 21% decline in Q1. The sectors that declined sharply in Q2 include computer components (-62%, impacted by Intel downsizing production) and chemicals (-42%). Without these two sectors, exports remained fairly stable in Q216. Pharmaceutical exports increased by 8%. Export performance has disappointed since Q415 in part due to weak global trade as well as the rather strong level of the shekel. The shekel appreciated by 7.5% in 2015 (against the basket of currencies), and Governor Flug has stressed that the current level of the shekel is not at what she considers equilibrium. We note that Israel enjoys a large current account surplus of 4.9% GDP in 2015, in addition to strong FDI into Israel's hi tech startups. Imports of raw materials (excluding energy) increased by 3.2% SAAR in Q2 following growth of 4.0% in Q1. This is a good indicator of future industrial production, although this growth in dollar terms is due in part to the increase of commodity prices this year. Imports of consumer goods continue to expand rapidly, underlining robust private consumption growth. Imports (excluding vehicles) are up 8.3% in Q2 following 6.6% in Q1. Consumer demand is being fueled by nominal wage growth of 3.5% y/y, which due to sharp deflation, translates into real wage growth (purchasing power) of 4.3%. In addition, employment growth remains strong and unemployment low (4.8% in May). Low policy rates of 0.1% have encouraged consumption as well. The most encouraging piece of news was the sharp increase in imports of machinery and equipment, by 42% SAAR in Q2, apparentl...