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Israel’s economy sustains growth and beats forecast

Israel's economy Reuters/Ilan Rosenberg
Haifa Port: Israel’s economy is performing relatively well

Israel’s economy sustained its solid growth in the second quarter, beating expectations with consumer spending bouncing back after a slow start to 2023, data from the Central Bureau of Statistics showed on Wednesday.

While not as fast as in 2022, growth this year has been bolstered by a low 3.6 percent jobless rate, overcoming the turmoil surrounding Prime Minister Benjamin Netanyahu’s plan to overhaul the judicial system by limiting the Supreme Court’s powers.

“Israel’s economy is performing relatively well considering various headwinds and GDP continues to grow in line with its pre-pandemic trend,” said Liam Peach, senior emerging markets economist at Capital Economics.

Gross domestic product grew an annualised 3 percent in the April-June period from the prior three months, compared with a forecast in a Reuters poll of analysts for a 2.4 percent expansion, and 2.9 percent in the first quarter, down from a prior estimate of 3.2 percent.

However, on a per capita basis, GDP grew 1.1 percent Israel’s economy is forecast to grow three percent in 2023 after a 6.5 percent pace in 2022, according to the Bank of Israel.

On the heels of the GDP data, Peach raised his estimate to 3.3 percent from 2.8 percent.

“There are risks to the outlook, including from the government’s controversial judicial reforms, but at this point we think the impact will remain limited,” he said.

Some, such as S&P Global Ratings, see just 1.5 percent growth this year but so far, the economy has been able to grow despite public anger over high living costs.

Private spending – the main growth driver – rose 1.9 percent in the second quarter after a 1.4 percent decline in the January-March period. Government spending gained 3.6 percent, although exports slipped 2.6 percent and investment in fixed assets dipped 1.1 percent in the second quarter.

The data comes after the bureau on Tuesday said Israel’s inflation rate eased more than expected to 3.3 percent in July to a 16-month low, from 4.2 percent in June. It still remains above the government’s one to three percent target range.

The central bank last month left its benchmark interest rate at 4.75 percent after 10 straight increases that took the rate from 0.1 percent in April 2022 and is expected to stay on hold on September 4.

While Peach still sees a final rate hike next month, most other analysts have begun to eliminate forecasts for further rate hikes and are shifting to plan for rate cuts in the coming months.

“We maintain our call for a rate cut in the first quarter of next year, though weak activity data could expedite that process,” said Citi economist Michel Nies.

Bank Hapoalim’s Victor Bahar sees rates on hold until the middle of 2024, citing a weaker shekel that could help to push up inflation and rising services costs.