Israeli economy growth in the second quarter: Israel’s economy grew a modest 1.2% in the second quarter of 2024, well below expectations, as the ongoing conflict in Gaza continues to weigh on economic stability. The Central Bureau of Statistics announced on Sunday that the growth rate, which fell short of the Reuters consensus estimate of 4.4%, reflects prolonged volatility since the start of the war in Gaza. Despite the disappointing growth, the weak performance is unlikely to lead to a central bank rate cut next week due to rising inflationary pressures.
The bureau’s initial estimate also revealed that, in per capita terms, Israel’s gross domestic product (GDP) declined by 0.4 percent during the April-June period. Overall growth was driven by a 12 percent increase in consumer spending, a 1.1 percent rise in fixed asset investment, and an 8.2 percent increase in government spending. However, these gains were largely offset by an 8.3 percent decline in exports.
Revisions to first-quarter GDP showed an annualized growth rate of 17.3 percent, up from a previous estimate of 14.4 percent, marking a recovery from the 20.6 percent contraction experienced in the fourth quarter of 2023.
The conflict in Gaza, which has persisted since the October 7 cross-border attack on southern Israel by Hamas-led Palestinian militants, has had a considerable impact on the Israeli economy. During the first half of 2024, Israel’s economy grew at an annual rate of 2.5%, compared to 4.5% during the same period in 2023.
“The economy is struggling to recover from the war, largely due to supply rather than demand issues,” said Jonathan Katz, chief economist at Leader Capital Markets. He noted that the absence of Palestinian workers since the conflict began has prevented a full recovery of investment in residential construction.
Inflation has also become a pressing concern: in July, the inflation rate soared to 3.2%, up from 2.9% in June, exceeding the government’s annual target of 1-3%. The Bank of Israel is scheduled to decide on interest rates on August 28.
After cutting its benchmark interest rate in January, the central bank has kept it on hold at subsequent meetings in February, April, May and July. The decision to keep the rate steady was prompted by geopolitical tensions, rising price pressures and looser fiscal policies as a result of the ongoing war.
Katz noted that “since the weak growth figures are driven by supply rather than demand issues, they are not expected to support interest rate cuts, especially in the context of accelerating inflation in the July consumer price index and heightened geopolitical risks.”
(With contributions from Reuters.)
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