Israel Growth Falls Short of Expectations as Exports Decline

(Bloomberg) —

Israel’s economy expanded 2.7 percent in the second quarter, falling short of analyst expectations as a strong currency hammered exporters.

The economy was expected to grow 3.1 percent for the quarter, according to the median estimate of six economist forecasts compiled by Bloomberg. Gross domestic product growth accelerated from 0.6 percent in the first quarter, which was revised down from 1.4 percent, the Central Bureau of Statistics said Wednesday. Exports of goods and services fell 8.8 percent.

The unexpectedly slow growth is further evidence that the soaring shekel is taking a toll on the export sector, which makes up more than one-third of Israel’s gross domestic product. The shekel strengthened almost 10 percent in the first half of the year, lowering profitability for companies that sell their products abroad. The currency has since weakened 3.7 percent.

Together with below-zero July inflation figures released Tuesday, the growth data lowers the chance that the Bank of Israel will raise interest rates anytime soon. Ten-year bond yields slipped 3 basis points Wednesday, a sign that investors are pushing back expectations for a rate increase as the strong shekel weighs on inflation.

Gross fixed capital formation rose 5.2 percent, with industrial investment growing 8 percent in the quarter. Imports of goods and services fell 1.1 percent while private consumption rose 4.7 percent.

Unlike other developed nations, which are struggling with low inflation mainly due to poor demand, Israel is in the rare position of experiencing surging demand and price deflation for almost three years. That’s mainly because the government is boosting competition and lowering prices in as many industries as possible, even as Israelis continue to consume avidly and salaries rise.

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