GDP growth disappoints as inflation accelerates

ISRAEL - In Brief 18 Aug 2024 by Jonathan Katz
Geopolitics: Negotiations continue in an attempt to reach a cease-fire. Biden sounds optimistic, while Hamas is rather doubtful. Israel continues to maneuver in Gaza and target Hezbollah in Lebanon, which retaliates with drone attacks as well. GDP growth was rather weak in the second quarter GDP growth was up 1.2% Saar but is still down 1.4% y/y. GDP growth is being supported by private and public consumption while other GDP components are way below their pre-war levels. This is mostly a supply issue (lack of Palestinian workers, evacuees) and less of a demand driven slowdown, although the export decline is worrisome. This weak print will carry little weight by the MPC, with inflation accelerating and geopolitical risks high. Inflation accelerates, both headline and core. Inflation is up 3.2% y/y in July from 2.9%, core is up 2.8% from 2.5%. Inflation in both non-housing services and core goods are accelerating. This trend is likely to continue on the back of an expansionary fiscal policy, a tight labor market and problematic housing dynamics. Despite the global easing cycle, inflation dynamics in Israel are less rate cut supportive, at least in the short run. The labor market continues to tighten with job vacancies up 20% in July compared to pre-war. FX: Last week, the shekel appreciated by 1.4% against the basket on optimism that a significant escalation can be avoided and cease-fire negotiations are progressing. Important data this week: Tuesday: Employment/unemployment data for July, Manufacturing (June) and Revenues from the various sectors (June), Wednesday: The BoI Composite Index of the economy.

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