Israel’s merchandise trade deficit swells as exports slump

Israel’s merchandise trade deficit swelled in the first quarter as exports slumped while imports rose sharply, a rare instance of gloomy economic data at a time when the economy is rapidly reopening from a year of coronavirus lockdowns.

The Central Bureau of Statistics said on Monday that merchandise exports fell at a 14.1% annual rate in the first three months of 2021, extending an 11.2% decline in the final quarter of 2020. Merchandise imports, meanwhile jumped 18.7% and 30.8%, respectively.

The result was that Israel’s merchandise trade deficit, not counting ships, aircraft and diamonds, widened to $24.6 billion in the first quarter from $17.6 billion the same time a year ago, the statistics bureau said.

Israeli merchandise exports had been on a downward trend for some years, even if it was more than offset by surging service exports generated by the high-tech industry. However, during the coronavirus year of 2020, merchandise exports turned higher and the rate of service exports accelerated.

The decline of merchandise exports in the last two quarters is probably due to several factors, among them the strengthening of the shekel versus the currencies of Israel’s main trade partners. Exporters must either raise prices, making them less competitive, or absorb a drop in their income.

On Monday, the shekel gained 0.5% on the dollar to 3.265. In the two quarters covered by the statistics bureau trade figures, the shekel gained more than 3% and has continued strengthening in April.

The statistics bureau figures show that the decline in exports was in high-tech and medium-tech categories. Makers of more traditional goods, whose exports tend to vary more from quarter to quarter, saw an increase in exports.

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Jonathan Katz, chief economist at Leader Capital Market, noted that the decline in Israeli merchandise exports ran counter to global trends.

He said it could be that the data for the last two quarters constitute a correction after the 2020 increases. “It’s important to remember that [Israeli] industrial exports fluctuate a lot because we have a few big factories that are responsible for a major share of exports. It’s enough for one factory to move exports from quarter to the next to disrupt the data … In any case, total exports won’t shrink because of the increase in high-tech services,” said Katz.

Imports rose across the board, but in a sign of good news for future economic growth, imports of raw materials, not counting diamonds and energy products, rose at an annualized 11.9% in the first quarter, the bureau said. Imports of capital goods soared by 52.5% . The rate has been even higher in the final three months of 2020.

“When there’s a rise in raw materials used by industry, it’s an early indication for future industrial exports or construction. Imports of capital goods, in other words, machinery and equipment, enhances potential economic growth in the future,” said Katz. “Looking long term, these are positive indicators.”

Imports of consumer goods rose at a 14.1% rate, which Katz said reflected the return of the Israeli economy to a normal level of activity following a sharp decline in consumer spending last year.

The trade data came as the Bank of Israel announced it was keeping its base lending rate unchanged at 0.1% to support economic recovery. Its revised economic forecasts confirmed its earlier most optimistic projection for a 6.5% increase in gross domestic product this year.

It said that exports, not counting diamonds and startup companies, would grow 4% this year, up from a previous estimate that civilian imports, not counting ships, aircraft and diamonds, would grow by 11%, unchanged from a previous forecast.