(Bloomberg) — Israel’s economy rebounded at a pace seen only after the coronavirus pandemic, as investment and consumption powered an upswing that partly offset the shock of more than seven months of war.
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Gross domestic product jumped an annualized 14.1% during the first quarter in seasonally-adjusted terms, slightly less than forecast, after slumping a downwardly revised 21.7% during the prior three months. GDP grew at a quarterly rate of 3.3%, according to preliminary figures published on Thursday.
The shekel maintained losses after the data release and traded 0.5% weaker against the dollar as of 8:16 p.m. in Tel Aviv. Israeli stocks retreated for the first time in more than a week.
The sharp pickup to start the year is masking the strain of a conflict that erupted after Hamas militants broke out of Gaza and rampaged through southern Israel on Oct. 7. Apart from its toll in lives, and the devastation wrought by Israel’s retaliatory offensive, the war has come at an enormous financial cost and brought disruption to foreign trade and industries such as construction.
“Signs of war are still evident and will likely be felt more strongly in the second quarter,” said Ronen Menachem, chief markets economist at Mizrahi Tefahot Bank. “If the conflict comes to a quick resolution, it will be easier for the economy to recover quickly this year and grow relatively rapidly in 2025.”
Still, the worst of the economic fallout may be coming to an end, with consumer confidence approaching its pre-war levels and the labor market quick to stabilize after unemployment spiked in October.
The Israeli Purchasing Managers’ Index in March shifted back into expansion from contraction, according to Bank Hapoalim, which pointed to an improvement in domestic orders and production while exports struggle.
The strength of economic momentum into the rest of the year still depends in large part on the course of the war, with Israel’s military now focused on Rafah, deploying troops into the southern Gaza city that’s housing more than a million people. As Israel edges closer to a full-blown invasion, tensions have increased with the US, European Union and Egypt over the threat to civilians and blocking of aid.
Under the assumption that the war against Hamas continues throughout 2024 but doesn’t lead to a wider regional conflict, S&P Global Ratings predicts Israel’s economic growth at just 0.5% this year. The Bank of Israel’s growth projection for 2024 is 2%, while the Finance Ministry’s estimate is lower at 1.6%.
GDP remains 2.8% below its pre-war level in the third quarter of last year, according to Goldman Sachs Group Inc., which downgraded its 2024 growth forecast for Israel to 1.2% from 1.6%.
“In the case of an escalation, it will become difficult to avoid a recession and growth will remain at a deficient level both this year and next,” said Menachem.
The economy’s strong showing could mean a longer pause by the central bank, which has kept interest rates unchanged for two straight meetings after a cut at the beginning of the year. Policymakers have been focusing on protecting the shekel and cooling inflation expectations.
The Israeli currency has been under pressure in recent months as the government ramped up expenditure. It’s down more than 4% since the start of March — the third-worst performance among a basket of 31 major currencies tracked by Bloomberg.
Inflation has meanwhile accelerated for two straight months, inching closer to the upper end of the government’s 1%-3% target range. The central bank is set to review rates at a meeting in just over a week.
“The decision will be heavily dependent on the development of geopolitical risks and, related to this, developments in the shekel,” Goldman analysts including Kevin Daly said in a report.
–With assistance from Harumi Ichikura.
(Updates with Goldman’s forecast in 10th paragraph.)
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