Israel: Economy grows at softest pace since Q3 2022 in Q3
GDP growth lost momentum in Q3, falling to 2.8% in seasonally adjusted annualized rate terms (SAAR) from 3.3% in the second quarter. Q3’s reading marked the softest growth since Q3 2022, and was in line with our panelists’ predictions. On an annual basis, economic growth moderated to 3.5% in Q3, from the previous quarter’s 3.7% expansion. Q3’s reading marked the worst reading since Q4 2022. Despite the slowdowns in quarterly and annual growth, Israel should still have outperformed the OECD average in the quarter.
Household spending growth improved to 1.8% SAAR in Q3 compared to a 0.4% expansion in Q2. Consumption was likely supported by strong population growth, and lower inflation than in Q2. Public consumption, meanwhile, improved to a 5.9% expansion in Q3 (Q2: +3.8% SAAR). Fixed investment growth fell to 1.2% in Q3 (Q2: +4.9% SAAR), with lower industrial investment partly offsetting rising residential investment. Exports of goods and services growth accelerated to 8.8% in seasonally adjusted annualized terms in the third quarter (Q2: +1.6% SAAR). In addition, imports of goods and services slid at a slower rate of 0.9% in Q3 (Q2: -8.0% SAAR).
The economy’s solid Q3 performance will not last. Our Consensus is for a double-digit quarterly contraction in Q4 due to the war with Hamas. The war will affect GDP through lower tourism and investment, the closure of educational establishments, disruptions to supply chains and business activity due to the internal displacement of citizens and the military mobilization, and restrictions on the entry of Palestinian workers to Israel.
On the outlook, Goldman Sachs’ analysts said:
“High-frequency data for the period since the conflict began provide a mixed picture. For example, high-frequency credit card data show a significant fall in spending in the initial weeks of the conflict, but there are early signs of spending in some categories now normalising. On our baseline forecast, we expect a contraction in Q4, followed by a recovery from Q1 onwards next year.”