With geopolitical risks elevated and inflation set to accelerate, monetary loosening will be postponed

ISRAEL - In Brief 19 May 2024 by Jonathan Katz

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Geopolitics: Military operations escalated both in Gaza and in the Northern border. Israel has returned to several areas in Gaza, in addition to pushing into Rafah. The missile barrage from Lebanon has become more intense. Gantz (from the opposition, who joined the military cabinet) demanded a plan for post-war administration of Gaza (other than Israel), a plan to bring the hostages home and formulating a plan to include the ultra-orthodox in some form of national service or conscription. He appears to be preparing his departure from the government, and the big question is whether other members of the Likud party will leave as well, forcing early elections. Meanwhile, demonstrations intensified Saturday night. Economic activity recovers partially GDP growth reached 14.1% saar (we had expected 15%) in Q124 following a 21.7% contraction in Q423. The level of activity is still 2.8% below pre-war. Private consumption is still 2% below pre-war, exports 9% below, and residential construction investments down 35%. Public investments are up 19% on strong defense spending. The partial recovery is encouraging, but full recovery will require a cessation of hostilities and a tangible solution to the lack of Palestinians workers in the construction sector. We doubt this GDP print will impact monetary policy which is more focused on market (shekel) stability and inflationary risks going forward. Inflation: April’s CPI surprised on the upside due to a spike in travel abroad costs as flight prices increased by 19% m/m. We note that core inflation remains low at 2.4% y/y and 2.1% excluding government measures (last month’s cigarette tax and car license adjustment). We remain inflation ...