Temporary contraction in economic activity in June due to the war; slowdown unlikely to affect monetary policy

ISRAEL - In Brief 30 Jul 2025 by Sani Ziv

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Summary of key findings The Bank of Israel’s composite index fell by 0.67% in June, due to the war with Iran. The decline reflects a temporary slowdown in economic activity, especially in private consumption and employment. Despite the recent slowdown, we expect the interest rate to remain unchanged in the August decision. A first-rate cut is expected during the fourth quarter of the year, assuming inflation continues to ease. A temporary slowdown in business activity The sharp decline reflects the temporary impact of the war with Iran, which included limited business activity, the shutdown of civilian flights, and a partial halt in trade. There was also a downward revision for May – from an initial estimate of +0.11% to a decline of 0.17%, suggesting weaker momentum even before the war. The chart shows the Bank of Israel’s composite index, which tracks real economic activity, alongside the industrial production index. The composite index dropped sharply after the war began in October 2023, recovered gradually in early 2025, and fell again in June 2025 due to Operation “Am Kalavi.” In contrast, the industrial production index remained relatively stable throughout the period and jumped in May 2025, probably due to higher manufacturing orders ahead of the military operation. Composite index and industrial production index (Jan 2023 – May 2025) Source: Central Bureau of Statistics (Israel) Strong increase in industrial production in May, ahead of the war Industrial production rose by 7.3% in May (seasonally adjusted), after a mild 0.5% gain in April. Compared to May 2024, total output was up 14.5%. Most of the growth came from the high-tech sector, which saw a 38% increas...