Israel's economy beats Q2 estimate, ignoring political turmoil

17 Aug 2023

Israel's economy continued to expand strongly in the second quarter of the year, surpassing predictions as consumer expenditure recovered from a sluggish beginning to 2023, according to figures released on Wednesday by the Central Bureau of Statistics.

Finance - Figure 1 — Photo www.marketscreener.com

Although not as speedy as in 2022, the progress this year has been amplified by a mere 3.6% unemployment rate, triumphing over the chaos revolving around Prime Minister Benjamin Netanyahu's ambition to modify the legal system by restricting the authority of the Supreme Court.

According to Liam Peach, a senior economist specializing in emerging markets at Capital Economics, the Israeli economy is doing quite well despite facing several challenges and the GDP is continuing to grow at a rate similar to before the pandemic.

The country's economic output, known as gross domestic product (GDP), increased by 3.0% between April and June. This is higher than the expected growth rate of 2.4% predicted by analysts in a survey conducted by Reuters. In the first quarter, the GDP had expanded by 2.9%, but this was slightly lower than the initial estimate of 3.2%.

However, when considering GDP per person, there was a growth of 1.1%.

According to the Bank of Israel, the economy of Israel is predicted to expand by 3% in 2023, following a growth rate of 6.5% in 2022.

Following the release of the GDP statistics, Peach revised his forecast to 3.3% from 2.8%.

He stated that there are potential dangers to the future prospects, particularly arising from the government's divisive legal changes; however, we believe that the consequences will be restrained at this stage.

There are experts, like S&P Global Ratings, who predict a mere 1.5% expansion in the current year. Nonetheless, the economy has managed to thrive thus far, despite the public's frustration regarding exorbitant living expenses.

Consumer expenditure - the primary factor driving growth - increased by 1.9% in the second quarter following a 1.4% decrease in the first quarter of the year. Public expenditure saw a growth of 3.6%, while exports experienced a decline of 2.6% and investment in physical assets decreased by 1.1% in the second quarter.

The information was released following the bureau's announcement on Tuesday that Israel's inflation rate declined beyond predictions to reach 3.3% in July, the lowest it has been in 16 months, compared to June's 4.2%. However, it is important to note that it is still higher than the government's desired range of 1% to 3%.

The central bank decided to maintain its benchmark interest rate at 4.75% in July. This decision came after a series of ten consecutive increases that began in April 2022 when the rate was at 0.1%. It is anticipated that the central bank will keep the interest rate unchanged on September 4th.

Despite the fact that Peach is still expecting one last increase in interest rates in the following month, the majority of other analysts have started discarding their predictions for additional rate hikes. Instead, they are now adjusting their strategies to accommodate anticipated reductions in interest rates in the upcoming months.

Citi economist Michel Nies restated our recommendation for a reduction in interest rates during the initial three months of the upcoming year, even though sluggish activity data might accelerate that course of action.

Victor Bahar from Bank Hapoalim predicts that interest rates will remain unchanged until around mid-2024 due to the depreciation of the shekel. This devaluation may contribute to an increase in inflation and a rise in the costs of services.

Written by Steven Scheer; Edited by Devika Syamnath and Alison Williams.