Israel Economic Forecast

After robust growth in Q4, the economy likely slowed in Q1. The real estate sector lost steam amid interest rate hikes, with house prices softening and housing transactions plummeting in February. Moreover, the manufacturing PMI averaged lower in Q1 than in Q4. Market uncertainty, strikes and protests linked to the government’s now-paused reform to weaken judicial independence could have further dampened momentum. That said, a strong labor market and recovering tourist arrivals will have provided support. Turning to Q2, judicial reform continues to overshadow the political panorama. Protests against the government continue, and Moody’s downgraded Israel’s credit outlook from positive to stable in mid-April. The reform’s eventual approval, a watered-down proposal or shelving the legislation are all possible outcomes, and the risk of the coalition’s premature collapse is rising.

Inflation eased to 5.0% in March, slightly below February’s 5.2%. March’s reading marked the lowest inflation rate since September 2022, but was still well above the Central Bank’s 1.0–3.0% target range. Inflation is projected to soften as this year progresses but remain above the upper bound of the Central Bank’s target range.