Israel economy shrinks in Q1 but rebound seen in rest of 2022

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Migrating starlings fly across the sky, in southern Israel December 28, 2015. REUTERS/Amir Cohen

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JERUSALEM, May 16 (Reuters) - Israel's economy shrank in the first quarter of 2022 after a robust 2021, but growth is expected to rebound during the year and help underpin central bank interest rate increases.

Led by declines in exports and consumer and government spending, gross domestic product shrank an annualised 1.6% in the January-March period from the prior three months, the Central Bureau of Statistics said on Monday. This was similar to a 1.4% decline in the U.S. economy in the quarter.

Growth of an annualised 2% was forecast in a Reuters poll of analysts. Excluding net taxes on imports, the economy fell by 3%.

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"The first quarter contraction is not a sign of weakness," said Liam Peach, emerging markets economist at Capital Economics. "It doesn’t change the bigger picture that Israel’s economy is operating in line with its pre-pandemic trend. Some softness was inevitable at some point."

Israel's economy grew at a 21-year high rate of 8.2% in 2021 and is expected to expand a further 5.5% in 2022, according to the Bank of Israel. In 2021, the economy also shrank in the first quarter before rebounding sharply.

The data come after the bureau on Sunday said Israel's inflation rate reached 4% in April, the first time it has hit 4% since mid-2011.

The need to rein in inflation combined with a strong economy led the central bank a month ago to begin a tightening cycle. The benchmark interest rate (ILINR=ECI) was raised by a quarter-point to 0.35% and is expected to rise gradually throughout 2022. The bank's next policy decision is due out next Monday.

Peach said that with growth expected to stay strong in the coming quarters, alongside rising inflation and the tightening labour market, the key interest rate should top 2% in early 2023. Israel's jobless rate declined to 3.1% in April from 3.4% in March.

After sharp gains in 2021, private spending - the economy's main driver - declined 0.7% in the first quarter. Exports, another key growth driver, slipped 11% but excluding diamonds and start-up companies exports fell a smaller 6.1%.

Government spending dipped 7%, while imports rose 17.3%.

The lone bright spot was in investment, which rose 3.3% in the first quarter. All of that gain was in residential building, which more than offset declines in industrial investment.

Tel Aviv share indices (.TA35), (.TA125) were marginally higher, while the shekel was flat versus the dollar at 3.41.

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Reporting by Steven Scheer; Editing by Ari Rabinovitch, Toby Chopra and Hugh Lawson

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