(Bloomberg) — Israel’s economy has rebounded at a pace seen only after the coronavirus pandemic, with investment and consumption fueling an upturn that partially offset the shock of more than seven months of war.
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Gross domestic product (GDP) rose at a seasonally adjusted annual rate of 14.1% in the first quarter, slightly below expectations, after a downwardly revised 21.7% decline over the past three months. GDP grew by 3.3% on a quarterly basis, according to preliminary figures released on Thursday.
Even after the release of the statistics, the shekel maintained its losses and was trading 0.5% weaker against the dollar as of 8:16 p.m. on the Tel Aviv market. Israeli stocks fell for the first time in more than a week.
The sharp economic boom at the start of the year masks tensions in the conflict that erupted after Hamas militants escaped from Gaza on October 7 and rampaged through southern Israel. Apart from the cost of human life and the devastation caused by Israel’s retaliatory attacks, the war caused huge economic losses and disrupted foreign trade and industries such as construction.
“Signs of war remain clear and will be felt even more strongly in the second quarter,” said Ronen Menachem, chief market economist at Mizrahi Tefahot Bank. “An early resolution to the conflict would make it easier for the economy to recover quickly this year and grow relatively quickly in 2025.”
Still, the worst of the economic fallout may be nearing its end, as consumer confidence approaches pre-war levels and the labor market is rapidly stabilizing after a spike in unemployment in October. .
Israel’s Purchasing Managers’ Index for March showed a shift from contraction to expansion, with exports struggling but domestic orders and production improving, Hapoalim Bank said.
The strength of economic momentum for the remainder of this year remains largely determined by the outcome of the war, with the Israeli military currently focused on Rafah and deploying troops to the southern Gaza city, home to more than 1 million people. As Israel moves closer to a full-scale invasion, tensions are rising with the United States, European Union and Egypt over threats to civilians and blocking aid.
S&P Global Ratings predicts Israel’s economic growth rate will be just 0.5% this year, assuming that the war with Hamas will continue through 2024 but does not lead to a broader regional conflict. The Bank of Israel’s 2024 growth forecast is 2%, while the Ministry of Finance’s forecast is lower at 1.6%.
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Gross domestic product (GDP) remains 2.8% below pre-war levels in the third quarter of last year, and Israel’s 2024 growth forecast is between 1.6% and 1.5%, according to Goldman Sachs Group. The rate has been revised downward to 2%.
“If the economy escalates, it will be difficult to avoid a recession, and growth will remain at an inadequate level both this year and next,” Menachem said.
The strong economic performance could lead to a longer hiatus from the central bank, which has kept interest rates unchanged for two consecutive meetings since lowering them at the beginning of the year. Policymakers are focused on protecting the shekel and cooling inflation expectations.
The Israeli currency has been under pressure in recent months as the Israeli government increases spending. It has fallen more than 4% since early March, making it the third-worst performer among a basket of 31 major currencies tracked by Bloomberg.
Meanwhile, inflation has accelerated for the second month in a row, inching closer to the upper end of the government’s target range of 1-3%. The central bank is scheduled to review interest rates at a meeting in just over a week.
“Decisions will largely depend on the evolution of geopolitical risks and related developments in the shekel,” Goldman analysts including Kevin Daly said in a note.
–Thanks to Harumi Ichikura for her assistance.
(Updates with Goldman forecast in 10th paragraph.)
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