Israel's Economy Surges 3.4% in Q1, Driven by Gaza Ceasefire

Israel's economy experienced a notable rebound in the first quarter of this year, with a 3.4% growth in its Gross Domestic Product (GDP). This growth was largely driven by a temporary ceasefire in the Gaza Strip, which allowed for a reduction in hostilities and an increase in economic activity. The commercial sector, in particular, saw a significant boost, with its GDP increasing by 4.4%. This growth can be attributed to the decrease in labor force losses due to the temporary cessation of hostilities, as fewer citizens were called to serve in the military reserves.

Fixed investments also played a crucial role in Israel's economic growth, surging by 8.7%. This increase was primarily driven by a mild recovery in the construction industry, which saw its output grow by 44.8%. However, it is important to note that this level is still close to the low point recorded in the fourth quarter of 2021, indicating a slow pace of post-war reconstruction. The private consumption sector, on the other hand, saw a decline of 5%. This decrease was mainly due to the waning demand for durable and semi-durable goods, as consumers had rushed to purchase these items before the new tax came into effect in January.

Despite the decline in private consumption, the per capita regular consumption expenditure increased by 4.1% when adjusted for one-off tax fluctuations. This indicates that business activities have actually improved when short-term disruptions are excluded. The export of goods and services also decreased by 1.8%, primarily due to a reduction in mergers and acquisitions of startups. This trend is related to the "exit wave" in Israel's technology sector. However, the overall export of technology-driven services still grew by 10.5%, highlighting the resilience of Israel's economy.

The Consumer Price Index (CPI) for April showed a year-on-year increase of 3.6%, exceeding the central bank's target range of 1% to 3%. This, combined with the first quarter's growth data, presents a challenging dilemma for the central bank's monetary policy committee, which will make its interest rate decision on May 26. The committee will have to balance the need to control inflation with the need to support economic growth.

While the temporary ceasefire provided a brief respite for Israel's economy, the situation in Gaza remains fragile and could escalate at any moment. If military operations intensify, defense spending, which already decreased by 15.6% in the first quarter, could surge again. This would squeeze resources for the civilian economy and exacerbate labor shortages, as the mobilization of military reserves could draw away approximately 300,000 workers from the labor force.