Shekel Drops on News of Badly Sagging Economic Growth

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Shipping containers in Ashdod Port. Merchandise exports sagged in the second quarter. Credit: Ilan Assayag

The shekel tumbled against the dollar and the euro Monday after the government said economic growth had dropped sharply in the second quarter and economists predicted that the slowdown would continue because of the Gaza war.

The greenback appreciated 1.04% to a Bank of Israel rate of 3.5030, its first breaching of 3.5 since March 27. The euro strengthened even more, adding 1.16% to a Bank of Israel rate of 4.6903.

In late trading the dollar was at 3.5080 and the euro at 4.6931.

Citing preliminary figures, the Central Bureau of Statistics said Sunday that Israeli gross domestic product grew at just a 1.7% annual pace in the second quarter, down from 2.8% in the first. The decline in growth was led by a 17.7% annualized drop in merchandise exports.

The bad news for the economy preceded Operation Protective Edge, which began July 8 – near the start of the third quarter – and took a heavy toll on retailing, tourism and to a lesser extent industry. On Monday, Bank Leumi forecast that the economy would contract in the third quarter.

The shekel actually strengthened during the first week of the fighting with Hamas, prompting the Bank of Israel to intervene when the rate fell as low as 3.4 to the dollar in mid-July. Since then the dollar has appreciated by about 2.8%.

“If until now the market had tended to overlook negative data and the shekel preserved its strength despite the circumstances, now that when the market is changing direction, any negative domestic news will serve as a trigger for shekel selling and a strong market reaction,” said currency trader FXCM.

Industrialists and many economists say the strong shekel has been a major factor in slackening Israeli exports. On Monday, FXCM said that if the shekel weakness continued long enough, it should boost exporters by making their products and services more price-competitive abroad.

In fact, many economists said the slowdown reported Sunday would probably prove less dramatic than the preliminary figures showed.

Simi Barak, an economist at Harel Insurance & Finance, predicted that the statistics bureau’s export figure would probably be revised upward, which would significantly impact growth because exports comprise about 40% of the country’s economic activity.

Meanwhile, Gil Bufman, chief economist at Bank Leumi, said the first-half GDP growth figure – which showed growth slowing more moderately to a 2.5% annual rate from 2.8% in the second half of 2013 – better reflected the state of the economy.

Still, Bank of America Merrill Lynch said Monday 2014 economic growth could be trimmed by as much as half a percentage point to 2.5% due to the war. Economist Vadim Khramov said he would downgrade his forecast when final second-quarter figures were in and it was clear the Gaza war was over.

Khramov said the slow growth increased the odds that the Bank of Israel would lower its base lending rate again in the next few months. The bank cut the rate 0.25 percentage point to 0.5% at the end of July to its lowest level since 2009, citing slacking economic growth.

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