In a special update on the Israeli economy, international rating agency S&P expresses pessimism about the speed of recovery that can be expected after the war, despite the jump in GDP reported for the first quarter.
"An estimate of Israel's first-quarter GDP released by the Central Bureau of Statistics (CBS) on May 16 was broadly in line with our latest economic projection. We maintain our below-consensus forecast that Israel's real economic growth will be 0.5% in full-year 2024, accelerating to 5.0% in 2025 as the geopolitical situation stabilizes and exports and investment activities recover," S&P writes, adding "We expect the initial economic rebound in the first quarter will be followed by a more moderate increase through the rest of 2024."
Last week, in an initial estimate, the Central Bureau of Statistics reported that Israel’s GDP grew at an annual rate of 14.1% in the first quarter of this year (3.3% in the quarter itself). This, however, represents only partial recovery from the annualized 21% drop in GDP in the fourth quarter of 2023, immediately after the Swords of Iron war broke out (5.7% in the quarter itself).
S&P acknowledges that the 3.3% growth figure for the first quarter is higher than its estimate of 3%.
Risk to credit rating remains high
S&P states that "risks to Israel's credit profile remain elevated," noting the possibility of escalation in the confrontation with Hezbollah on Israel’s northern border. "We also view the deteriorating relationship between Israel and its closest allies as a risk that could impair Israel's economic rebound and investor confidence," S&P adds.
S&P also notes the possibility that the National Unity Party may leave the government and yesterday’s applications for arrest warrants against Prime Minister Benjamin Netanyahu and Minister of Defense Yoav Gallant by the prosecutor of the International Criminal Court as contributing to uncertainty in Israel.
Government spending drove first quarter surge
The recovery in the first quarter fails to impress S&P’s analysts, who write: "Domestic consumption increased significantly by 4.6% in the first quarter of 2024, already exceeding the levels of the fourth quarter of 2023. However, the increase was predominantly driven by higher government spending, with private consumption remaining below pre-war levels in real terms. Exports contracted further by 2.9%, following a sharp decline of 5.9% in the fourth quarter of 2023. This mainly resulted from a continued decline in tourism and a contraction in the export of industrial goods."
S&P also does not believe that the rapid recoveries in Israel’s economy after previous rounds of conflict and after the Covid-19 pandemic will be repeated this time. "We expect the lingering issues in the impacted tourism, construction, and agriculture sectors, alongside elevated regional security and domestic political uncertainty, will constrain a faster recovery this year and we continue to expect GDP growth of 0.5% in full-year 2024," its report states.
A month ago, S&P downgraded Israel’s credit rating by one rung, from AA- to A+, and kept its rating outlook at "Negative". S&P thus came broadly into line with Moody’s, which downgraded its rating for Israel earlier in the year.
Published by Globes, Israel business news - en.globes.co.il - on May 21, 2024.
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