When high GDP growth is unwelcome-or misleading

The news that Israel's GDP rose at an annualised rate of 7.8% in the fourth quarter of 2010 was quickly seized upon by the prime minister, finance minister and other government spokesmen as evidence of their successful management of the economy. But professional economists expressed both amazement and suspicion at this unexpected display of strength, which far exceeded the rate of growth in the earlier quarters of 2010.

When the initial excitement subsided, closer analysis of the data raised two sets of problems. Even if the numbers are taken at face value, the growth they reflect is concentrated in the wrong areas and appears unsustainable. Beyond that, the elevated figures for economic growth may be partly the result of statistical methodology rather than an underlying expansion of economic activity.

The data appears to tell a seemingly simple story: the domestic economy is in the throes of a consumer and investment-led boom, which is heavily focused on durable goods purchases by consumers and purchases of equipment by firms. But in both sectors, purchases of new vehicles are the dominant factor. To a significant extent, this represents a catch-up for the slump in such purchases recorded in 2009, during and after the global recession. It may also be the case that aggressive marketing of loans by the commercial banks is fuelling this consumption boom. What is almost certain, however, is that an annualised increase of 40% in consumption of durable goods, on a per capita basis, is unsustainable.

The flip side of the domestic strength is the weakness of exports. Although overall export growth ran at an annualised rate of 10% in the fourth quarter, this was much less than the parallel figure for imports-of 22.5% growth. Even worse, though, is the fact that "core exports"-excluding diamonds and start-up companies-rose at a negligible 1.1% annual pace in the fourth quarter, after falling 2.3% in the third, thus ending the year at a lower level than they had been in mid-year.

Thus, the data themselves do not represent an economic success story. But they may well be distorted anyway. In fairness, the Central Bureau of Statistics (CBS) is well aware of the potential shortcomings in its work. Every publication of quarterly national accounts data contains an italicised disclaimer on the front page noting firstly that the raw data undergo "seasonal adjustment" to take account of seasonality and the incidence of holidays. The CBS adds that "series of economic statistics in Israel are characterized by relatively high irregularity. This complicates analysis of developments on the basis of seasonally adjusted quarterly data, and it is preferable to evaluate developments over longer periods".

Several private-sector analysts have highlighted the problems stemming from the seasonal adjustment of quarterly data. Ron Eichel, chief economist at the Meitav investment house, has noted that on an unadjusted basis, the annualised rate of GDP growth in the fourth quarter was only 2.4%, and for the business sector alone, was actually negative, at -2.9%.