Israel’s Composite Economic Index (CEI) contracted by -0.64% MoM in August 2025, continuing a downward trend from the previous two months. This decline contrasts with the modest expansions seen earlier this year, such as January’s +0.7% and February’s +0.6%. The CEI aggregates key economic indicators, offering a timely gauge of overall economic momentum.

Drivers this month

• Manufacturing output fell by 1.2%, reflecting weaker export demand.
• Retail sales declined 0.8%, pressured by inflationary constraints on consumer spending.
• Construction activity dropped 0.5%, partly due to tighter credit conditions.
• Service sector growth slowed to 0.1%, the weakest pace since early 2024.

Policy pulse

The Bank of Israel’s recent rate hikes, aimed at curbing inflation near 3%, appear to be weighing on economic activity. The CEI’s contraction suggests monetary tightening is beginning to slow growth, consistent with the central bank’s inflation-targeting framework.

Market lens

Following the release, the Israeli shekel (ILS) depreciated modestly by 0.3% against the USD, while 2-year government bond yields rose 5 basis points, reflecting increased market caution. Breakeven inflation rates held steady near 2.9%, signaling stable inflation expectations despite the slowdown.

The CEI’s components reveal mixed signals amid a challenging macro backdrop. Inflation remains elevated at 3.1% YoY, above the Bank of Israel’s 1–3% target range, prompting tighter monetary policy. Unemployment held steady at 3.8%, near historic lows, but wage growth has slowed to 2.4% YoY, indicating cooling labor market pressures.

Monetary Policy & Financial Conditions

The Bank of Israel has raised its policy rate by 75 basis points since May 2025, pushing the benchmark to 4.25%. Financial conditions have tightened, with credit spreads widening 15 basis points and mortgage rates rising to 5.1%. These factors contribute to the CEI’s downward momentum.

Fiscal Policy & Government Budget

Fiscal policy remains moderately expansionary, with the government increasing infrastructure spending by 4.5% YoY in the first half of 2025. However, rising debt service costs (up 12% YoY) constrain further stimulus. The budget deficit is projected at 3.2% of GDP for 2025, slightly above the 3% target.

External Shocks & Geopolitical Risks

Heightened geopolitical tensions in the region and global supply chain disruptions have dampened export growth, which contracted 1.5% MoM in August. Energy prices remain volatile, adding inflationary pressure and uncertainty to the outlook.

Market lens

Immediate reaction: The ILS/USD exchange rate weakened by 0.3% within the first hour post-release, reflecting investor concerns over growth prospects. Meanwhile, the Tel Aviv 35 Index (TA35) declined 0.5%, led by cyclical sectors sensitive to economic activity.

Looking ahead, the CEI’s trajectory depends on several key factors. The Bank of Israel’s monetary policy stance, geopolitical developments, and global demand will shape near-term outcomes. We outline three scenarios:

Bullish scenario (20% probability)

• Geopolitical tensions ease, boosting exports and investor confidence.
• Inflation moderates faster than expected, allowing monetary easing by Q1 2026.
• CEI rebounds to +0.3% MoM by year-end, supporting 3.5% GDP growth in 2026.

Base scenario (55% probability)

• Monetary policy remains restrictive, keeping growth subdued.
• External demand stabilizes but does not accelerate significantly.
• CEI remains near zero to slightly negative through Q4 2025, with GDP growth around 2.0% in 2026.

Bearish scenario (25% probability)

• Geopolitical risks escalate, disrupting trade and investment.
• Inflation remains sticky, forcing further rate hikes and deeper contraction.
• CEI declines further to -1.0% MoM, risking recessionary conditions and sub-1% GDP growth.

Israel’s Composite Economic Index MoM for August 2025 signals a cautious macroeconomic environment. The ongoing contraction reflects the combined impact of monetary tightening, geopolitical uncertainty, and external shocks. While structural strengths such as a resilient labor market and fiscal support provide buffers, risks remain skewed to the downside. Policymakers and investors should monitor inflation dynamics and geopolitical developments closely to gauge the timing and scale of potential policy adjustments.

Key Markets Likely to React to Composite Economic Index MoM

The CEI’s movements historically influence several key markets. The TA35 index tracks domestic economic momentum closely, reacting to shifts in growth expectations. The ILSUSD currency pair reflects changes in investor sentiment and monetary policy outlook. The BTCUSD crypto pair often moves inversely to risk-off sentiment triggered by economic slowdowns. Additionally, the TEVA pharmaceutical stock is sensitive to domestic economic conditions and healthcare spending. Lastly, the EURILS pair captures cross-border trade and investment flows influenced by CEI trends.

FAQs

What is the Composite Economic Index MoM for Israel?

The Composite Economic Index MoM measures monthly changes in Israel’s overall economic activity by aggregating key sector indicators.

How does the CEI affect monetary policy decisions?

The CEI provides timely insight into economic momentum, helping the Bank of Israel adjust interest rates to meet inflation and growth targets.

What are the main risks to Israel’s economic outlook?

Geopolitical tensions, inflation persistence, and global demand shocks pose significant downside risks to Israel’s growth trajectory.

Key takeaway: The August 2025 CEI contraction signals a cautious growth outlook amid tightening monetary policy and external uncertainties. Close monitoring of inflation and geopolitical developments will be critical for navigating the months ahead.

This has been drafted with AI assistance and then thoroughly reviewed, refined, and approved by our human editorial team to ensure accuracy, and originality.