Israeli Economy Still Hasn't Recovered From Gaza War, Central Bank Says

Tourism rebounding faster than expected, but exports are spotty, Monetary Committee minutes say.

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IDF soldiers facing Gaza during Operation Defensive Edge, on Aug. 3, 2014.
IDF soldiers facing Gaza during Operation Defensive Edge, on Aug. 3, 2014.Credit: Reuters

Israel’s economy is recovering from the impact of last summer’s Gaza war, although the losses sustained by the 50 days of fighting haven’t entirely been recovered, the Bank of Israel said on Monday in minutes of its Monetary Committee meeting.

The central bank said merchandise exports – not counting ships, aircraft and diamonds – had declined in November by 3% after rising the previous two months, while service exports were holding steady at the “peak levels” they reached at the start of 2014.

Tourist arrivals and overnight stays at hotels showed “some recovery,” the bank said, and the recovery is occurring more rapidly than in previous rounds of fighting with Hamas and Hezbollah in Lebanon.

On Sunday, the government reported that tourist arrivals declined 1% last year from 2013, with the number plunging 24% in the third quarter.

“Indicators which became available this month [December] point to a recovery in activity after Operation Protective Edge, with the economy’s expected return to its path of growth from before the operation expressed in a relatively high growth rate in the coming quarter,” the Bank of Israel’s minutes said.

The assessment came before the five-member Monetary Committee voted unanimously on December 29 to keep the bank’s key lending rate at a record low 0.25%. The central bank slashed the rate over the summer from 0.75%, as the 50-day conflict with Hamas forced factories and stores to close and caused tourists to cancel visits during the peak summer season.

The Central Bureau of Statistics said gross domestic product fell at an annual rate of 0.4% in the third quarter, when Protective Edge was raging. It has not yet published fourth-quarter figures, but at the end of December said full-year 2014 growth was 2.6%, the lowest in five years by 0.4 percentage points – more than the bureau had expected.

Committee members discounted concerns that deflation in Israel did not reflect declining consumer spending and attributed it to external developments, such as plunging global petroleum prices. The consumer price index will be low in January because of cuts in water and electricity rates, but the committee noted that these were one-time reductions.

Inflation is expected to be 1.1% in 2015 (1.5% not counting water and power rate cuts), which is at the lower end of the government’s target of 1% to 3% annually.

The one area of concern the committee noted was for home prices, which increased 6.5% in the 12 months to October 2014, up sharply from the 12 months through September. Home sales and mortgage demand – which the Finance Ministry reported on Monday jumped to 5.5 billion shekels ($1.4 billion) in December – continued.

But on the positive side, the central bank pointed to a “sharp increase” in construction starts and completions over the past 12 months, to 44,200 and 42,000 units, respectively.

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