Economic growth gains traction in Q1

GDP reading: GDP growth gathered pace to 3.4% in seasonally adjusted annualized rate terms (SAAR) in the first quarter from 1.9% in the fourth quarter of last year. Q1’s reading was broadly in line with market expectations, with the economy benefiting from the reduced intensity of conflict due to peace deals reached with Hezbollah and Hamas (the deal with Hamas terminated in mid-March). As a result, Israel’s economy finally recovered its pre-war level in Q1. On an annual basis, economic growth slowed markedly to 1.4% in Q1, compared to the previous quarter's 7.2% expansion.

Expenditure drivers see disparate performance: Private consumption contracted 5.0% in Q1, marking the worst result since Q4 2023 (Q4 2024: +4.1% SAAR). That said, the fall was partly due to consumers bringing forward vehicle purchases to Q4 ahead of tax changes at the outset of this year. Public consumption dropped 0.2% in Q1 (Q4 2024: +8.8% SAAR) on lower defense spending, while fixed investment growth improved moderately to 8.7% in Q1, following the 8.6% increase in the previous quarter. Exports of goods and services contracted 1.8% in Q1 (Q4 2024: +10.4% SAAR), while imports of goods and services growth slowed to 5.0% in Q1 (Q4 2024: +16.0% SAAR).

GDP outlook: The economy should continue to grow at a robust pace in the coming quarters, though the recent expansion of the offensive in Gaza could cap GDP by restricting labor supply.

Panelist insight: Digging deeper into the data, Goldman Sachs analysts said: “The expenditure breakdown of the print points to a sharp recovery in investment, in particular construction spending, which rose by +44.9%qoq annl. We have previously flagged weakness in construction as the main driver of the slower-than-expected recovery in Israeli GDP since October 7, reflecting the lack of construction workers following widespread conscription and the sharp decline in Palestinian guest workers. However, employment in construction has recovered close to pre-October 7 levels, which likely contributed to the strength in this category of GDP.”

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