CORRECTED - UPDATE 2-Israel growth picks up, consumers and exports help

By Steven Scheer

JERUSALEM, Nov 16 - Israel's economic growth accelerated to an annual rate of 2.2 percent in the third quarter, official data showed on Monday, propelled by buoyant consumer spending and a sharp rise in exports.

Analysts were split over the actual strength of the recovery and said the outcome of an interest rate decision next week depended on how the Bank of Israel viewed the report.

Israel in August was the first major central bank to raise short-term borrowing rates. The Bank of Israel has held its key rate the past two months but some economists expect another hike by the end of the year and as soon as next Monday.

"Assuming they were disappointed with the figure as I was they will wait another month," said Vered Dar, chief economist at the Psagot brokerage, noting she had forecast third-quarter growth of 3 percent.

"But if they thought it was a strong figure, they might not wait another month and hike on Monday," she said.

Dar said that like similar reports from the United States and Japan, Israel's gross domestic product in the third quarter had distortions and was influenced by one-time factors such as a rush to buy cars before taxes rose in early September.

Tel Aviv share indexes closed 0.2 to 0.4 percent higher, while the shekel <ILS=> advanced 0.6 percent versus the dollar.

Israel's economic growth in the third quarter was broad-based, posting large gains in consumer spending (up an annual 8.9 percent), exports and investments in fixed assets .

In the second quarter, the economy grew at an annual rate of 1 percent -- a revision from the Central Bureau of Statistics' prior estimate of 0.8 percent -- when government spending helped to drive the economy.

Economists noted that the rise in third-quarter growth was expected since the central bank's economic performance index -- comprised of exports, imports, industrial output and revenue from commerce and services had been growing strongly of late.

IMPORTS JUMP

Gil Bufman, chief economist at Bank Leumi, said total uses in the economy from spending, exports and investment showed the economy grew at a robust annual rate of 14 percent but the main figure was far lower because imports -- which is subtracted from growth -- surged 61.9 percent.

"The GDP number clearly understates the magnitude of economic growth," he said, predicting a strong fourth quarter and growth for all of 2009 at zero to 0.5 percent -- well above negative rates for other Western economies.

"All in all, the Israeli recession was short, shallow and different than that of other countries," Bufman said, adding that imports of raw materials and consumer goods should be counted as economic activity.

On the heels of the global economic and financial crisis, Israel had entered a recession in the fourth quarter of 2008, contracting by 1.6 percent in the last three months of 2008 and by 3.2 percent in the first quarter of 2009.

But helped by state spending and gains in exports -- some 45 percent of economic growth -- and consumer spending, the economy eked out growth in the second quarter.

The Bank of Israel forecasts zero growth for all of 2009 and growth of 2.5 percent next year.

Stanley Fischer, governor of the central bank, said earlier on Monday the economy's situation was good but growth was still not fast enough to significantly lower jobless levels. He also said inflation was not a problem. [ID:nLG385144]

Consumer prices, issued on Sunday, rose 0.2 percent in October from September to stand 2.9 percent higher over the past 12 months. The central bank on Monday said inflation expectations in the bond market for the next year are 2.2 percent.

Bufman believes that an official interest rate at 0.75 percent was far too low. He said other countries with a similar rate have zero inflation and negative growth.

"Something is out of line for the Israeli economy and interest rate story," he said.