Israel’s GDP growth slows as wartime exports, investments cool

ISRAEL’S economic growth slowed more than expected over the second quarter of the year, failing to sustain its initial rebound from the war against Hamas.

Gross domestic product rose by an annualised 1.2 per cent in seasonally adjusted terms, after surging a revised 17.3 per cent during the prior three months, according to preliminary figures published by Israel’s Central Bureau of Statistics on Sunday (Aug 18). Economists surveyed by Bloomberg had expected growth of 5.9 per cent.

GDP expanded at a quarterly rate of 0.3 per cent, the figures showed.

The figures were weak compared to forecasts, as well as preliminary signs from leading indicators, according to Ronen Menachem, chief markets economist at Mizrahi Tefahot Bank. GDP per capita shrank an annualised 0.4 per cent, “which clearly indicates the significant damage that the ongoing war is causing to the economy”, he said.

The biggest drivers of the slowdown were exports, which excluding diamonds and startup companies declined for a third consecutive quarter by 7.1 per cent, as well as a stagnation in fixed asset investments. Imports, not including defence imports, ships, aircraft and diamonds, also shrank an annualised 7.3 per cent.

Fixed asset investments rose just 1.1 per cent, following the 65.4 per cent slump in the last quarter of 2023 that was driven by construction. The sector relies on Palestinian workers from the West Bank, who have been banned from entering Israel since the start of the war. The government has not been able to keep its promise to replace them with other foreign workers.

A spike in government and private consumption did little to offset the slump in exports and investments.

Consumption

Government consumption surged an annualised 8.2 per cent versus 2.6 per cent in the previous quarter, adding to concern that economic growth has become over reliant on high public expenditure, which is mainly associated with the temporary needs of war. Private consumption rose by 12 per cent, exceeding pre-war levels.

While overall GDP increased by 1.2 per cent, growth of the business sector decreased by 1.9 per cent, noted Mizrahi’s Menachem, evidence of the economic damage caused by the 10-month-old conflict.

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Despite the cooling in economic growth, the Bank of Israel is unlikely to cut borrowing costs at its next rate decision in 10 days. Israel has seen its inflation rise continuously in recent months, with the latest reading at an annual rate of 3.2 per cent – outside the 1 to 3 per cent target range of the central bank.

“Since the weak growth figures are due to supply and not demand issues, they are not expected to support interest rate cuts, especially against the background of signs of acceleration in inflation in the July index and a high level of geopolitical risks,” said Jonathan Katz, economic strategist at Leader Capital Markets.

The Israeli finance ministry projects growth of 1.9 per cent for the year, while the country’s central bank has already downgraded its forecast to 1.5 per cent.

“Moving into the second half of the year, it is likely that the economy’s activity will falter,” said Menachem. “The economy is at full employment, the number of job vacancies is increasing, as is the difficulty in manning positions with professional workers will continue to restrain activity and GDP growth.”

The war broke out after the Oct 7 attack on Israel by Hamas – designated terror organisation by the US and the EU – that saw 1200 people killed and 250 taken hostage. The death toll in Gaza has now exceeded 40,000, according to the Hamas-run health ministry, which does not distinguish between militants and civilians. Talks are currently under way in an attempt to achieve at least a temporary ceasefire in Gaza that will also involve the release of hostages in return for Palestinian prisoners. BLOOMBERG