Leumi Economic Weekly

Published: July 29th 2010
in Economics » Israel

The "basic" foreign trade deficit/surplus
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The surplus in Israel’s basic goods foreign trade account narrows
Israel’s overall trade deficit amounted to US$2.7bn in the first half of 2010, compared to US$2.0bn in the same period of 2009. This increase stems primarily from a rise in expenditures on oil imports. In addition to this broadly defined overall trade deficit, there is also a more narrowly-defined figure that neutralizes from the overall deficit volatile components such as ships, aircraft, fuel and diamonds. This “basic” trade deficit, which holds great economic significance in terms of the central trends of the economy, is presented in the accompanying graph.


In the last six quarters there was no deficit according to this basic account, but instead there was a surplus. What this means is that there exists a surplus of exports over imports in the foreign trade goods account; however, the trend in recent quarters is one of a rapid decline in this surplus. The factor behind this narrowing surplus, in particular in the second quarter of this year, compared to the first quarter, is the decline in exports, and this development has negative economic implications of an economic slowdown, to be explained below. In contrast, imports expanded, albeit by only a low rate.


The weakness in exports is notable in most sub-sectors, except for the pharmaceuticals and the machinery and equipment sectors, which expanded by an accelerated rate in the second quarter. Despite what is written above, it is important to remember that the analysis of foreign trade data is based on data assessed in US dollar terms, such that it is likely to be influenced by, among other things, changes in the exchange rate of the dollar in the world vis-à-vis the different currencies. In the second quarter of the year the dollar strengthened (on a quarterly average) vis-à-vis the euro by of 9%, compared to the first quarter, a significant and severe rate in relation to the past.


Therefore, and taking into consideration the significant component of exports to Europe, it is possible the quantitative export data (that is to say, total exports excluding the impact of the currency) will not indicate such a negative trend as that which is reflected in the data based on nominal US dollar terms.


How is demand for Israeli export expected to develop?
What is the meaning of the decline in the basic export surplus? Firstly, it may have a moderating effect on economic growth, such that the second quarter 2010 economic growth rate may be below first quarter growth. Data on the composite state-of-the economy index from the months April – May strengthen the feeling of a slowdown in the second quarter of the year. Secondly, in the event all other conditions remain equal, a decline in the surplus of the current account of the balance of payments is possible, which will likely have an impact over the long-term in terms of the real exchange rate of the shekel.


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