Israel economy powered to 12.4% gain in Q3 after end of Iran conflict

Israel's economy experienced a robust rebound in the third quarter, with annualized GDP growing 12.4% from July to September, significantly surpassing the 8% consensus forecast and recovering sharply from a Q2 contraction influenced by regional conflicts. This strong performance, driven by substantial increases in consumer spending, exports, and investment, has contributed to record highs in Tel Aviv share indices and an 11% appreciation of the shekel. With October inflation holding steady at 2.5%, the Bank of Israel may consider interest rate cuts, potentially starting as early as next month.

Analysis

Israel's economy demonstrated a robust rebound in Q3, with annualized Gross Domestic Product growing 12.4% from the prior three months, significantly surpassing the Reuters consensus of an 8% expansion. This strong performance marks a rapid recovery from a revised 4.3% contraction in Q2, which was impacted by a 12-day conflict with Iran. The rebound was broadly driven by substantial increases in consumer spending (+23.0%), exports (+23.3%), and investment (+36.9%), alongside a 4.4% rise in government spending.

This economic resilience has translated into positive market reactions, with Tel Aviv share indices reaching all-time highs and the shekel appreciating 11% year-to-date against the dollar to a 3-1/2-year peak. While 2023 growth was 1% and 2024 is projected at 2.5% by the Bank of Israel, the longer-term outlook suggests around 5% growth by 2026, despite ongoing impacts from the Gaza war.

With annual inflation holding steady at 2.5% in October, the strong Q3 GDP data supports a cautious monetary approach by the Bank of Israel. Leader Capital Markets Chief Economist Jonathan Katz anticipates potential short-term interest rate cuts, possibly starting as early as next month, to reach 3.75% from the current 4.5%. This potential easing could further stimulate economic activity.

Key Decisions for Investors

• Investors should consider the strong Q3 economic rebound and potential for interest rate cuts as tailwinds for Israeli equities and the shekel.
• Monitor geopolitical developments, particularly the ongoing Gaza war, as continued conflict or escalation could impact economic projections and market stability.
• Evaluate the Bank of Israel's upcoming monetary policy decisions, as interest rate adjustments will influence capital flows and domestic economic activity.