Israel Second-Quarter GDP Growth Slows as Exports Plunge

Israel’s economic expansion slowed in the second quarter as exports plunged almost 18 percent, fueling speculation that the central bank may cut interest rates again to spur growth.

Gross domestic product grew 1.7 percent, compared with a revised rate of 2.8 percent in the first three months of the year, the Central Bureau of Statistics in Jerusalem said yesterday. The median estimate of five economists was for a growth rate of 2.7 percent, according to data compiled by Bloomberg.

The data support “the low interest rate, and maybe even another cut,” said Ori Greenfeld, chief economist at Psagot Investment House Ltd. in Tel Aviv. “The Bank of Israel apparently will cut again, maybe not in the next few months, but there is room for another cut.”

A strengthening shekel and the military’s offensive against militants in the Gaza Strip prompted the central bank to unexpectedly cut its benchmark interest rate on July 28 to 0.5 percent, the lowest level in five years. The monthlong conflict, which has has been quieted by a truce expiring at midnight tonight, may cause the economy to contract between 1.5 percent to 2 percent in annualized terms in the third quarter, said Rafi Gozlan, chief economist at Israel Brokerage & Investments - IBI Ltd.

Shekel Weakens

The shekel weakened to a five-month low against the dollar, falling 0.4 percent to 3.502 at 9:08 a.m. in Tel Aviv.

Manufacturers have called on policy makers to help exporters by cutting the base rate to zero and buying enough dollars to keep the local currency at 3.8 to the dollar. Exports tumbled 17.7 percent in the second quarter after rising 0.1 percent in the first and 26 percent in the last three months of 2013.

“With the Gaza conflict hurting an already lagging economy, it’s going to be more rate cuts and more intervention to weaken the shekel,” Luis Costa, the head of Europe and Mideast strategy at Citigroup Inc., said in a phone interview on Aug. 14.

The Israeli currency has risen 2 percent against the dollar in the past year, making it the eighth-best performer in a basket of 31 major currencies Bloomberg tracks.

Bank of Israel Deputy Governor Nadine Baudot-Trajtenberg said in an interview July 29 that the surprise rate cut may not be the last in the current cycle. While policy makers see no present need to cut borrowing costs further, “in principle there is still more room,” Baudot-Trajtenberg said.

A report by Harel Insurance & Financial Services Ltd. published yesterday, called the second-quarter economic data “disappointing,” especially “given the expected influence of the offensive on third-quarter growth.” Israel’s statistics office said this month that tourism dropped 21 percent in July from a year earlier as a result of the fighting.

(Updates with economists’ estimates in second paragraph.)
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