CURRENT ACCOUNT DATA FOR Q4 2018

March 10, 2019

Bottom line: The surplus in Israel’s current account for October-December 2018 jumped to $4.19bn, one of the highest-ever quarterly surpluses. But don’t get carried away by this good news. The rise was overwhelmingly due to a massive $1.14bn surplus on primary income (see definition below) – by far the largest-ever surplus on this component, which usually posts a deficit. It is doubtful if this can be repeated and it may even be revised down in the future. Other than that, the picture was mixed, but the $500m decline in the surplus on trade in services is a negative, especially for the fourth quarter when this surplus usually posts a strong rise.

 

Because the current account data is so critical, yet is widely ignored in the media and barely understood among the general public, I will first give some general background.

 

WHAT IS THE CURRENT ACCOUNT?

• A country’s current account is the summary of all its transactions with the rest of the world over a defined period (usually a quarter or a year). It has four main components: trade in goods; trade in services; primary income; secondary income.
• Israel’s current account has the following characteristics:
  • trade in goods: includes manufactured goods of all sorts; diamonds (raw and polished); energy products (imports only); other raw materials.
  • trade in services: includes tourism (both directions); transportation services (air and sea, passengers and cargo); and, critically, ‘other services’, which includes software and computer consultancy; scientific R&D — including proceeds from sale of start-up companies; and other consultancy services.
  • primary income: comprises income from labour — income of foreign workers in Israel less income of Israelis working abroad; and income from capital — payment of interest and dividends on Israeli investments overseas less payments on foreign investments in Israel.
  • secondary income: unilateral payments made by foreign entities to a) the Israeli government (including government-to-government aid); b) Israeli institutions (e.g. hospitals, educational institutions, etc.) and c) individuals (German restitution payments, personal bequests, gifts etc.) less unilateral payments made by Israeli entities to foreign entities.

 

CURRENT ACCOUNT DATA FOR THE FOURTH QUARTER OF 2018

• The current account surplus in October-December 2018 totaled $4.19bn, an amount only exceeded (slightly) in the second and third quarters of 2015.
• The deficit on trade in goods increased slightly over Q3, to just under $4bn, but this is well below the levels of Q1 and Q2 and suggests that the rise in the trade deficit has peaked.
• The surplus on trade in services fell by almost $500m from Q3. This is a large absolute decline, especially since Q4 almost always sees a rise in this surplus. If this data is not corrected, it must be a source of concern going forward.
• That said, it should be noted that the services surplus, at $4.89bn, is the highest-ever, except only that for Q3. It is 18.6% higher than Q4 of 2017.
• The surplus on primary income, at $1.13bn, is BY FAR the biggest-ever surplus in this item, and represents a swing of $1.6bn from the Q3 deficit of $469m. This seems implausible and too good to be true. A revision can be expected…
• The surplus on secondary income rose by some $340m, but it was the Q3 total of $1.8bn which was rather low, rather than the Q4 total of $2.14bn being high. In fact, the latter is an average level for this item.