↵

Turkey’s decision last week to freeze all goods trade with Israel until there is a permanent ceasefire in the war in Gaza is not likely to have a major macroeconomic impact in either country, although Israel’s construction sector appears vulnerable and there could be some upward pressure on Israeli food inflation, according to Capital Economics.

At the margin, the suspension of trade by Ankara could strengthen the Israeli central bank’s cautious approach to interest rate cuts, it also said in a note to investors.

Emerging markets economist at Capital, Liam Peach, advised: “Trade with Israel is generally small for Turkey, representing 2.0% of its goods exports (0.5% of GDP) and less than 0.5% of its imports. The trade ban is likely to have a limited impact on its own economy.

“It is a bigger deal for Israel, mostly on the import side: Turkey was Israel’s sixth large trading partner in 2023 and imports amounted to $5bn (5% of total imports). These were equal to 1.0% of Israel’s GDP.”

Sources: UN Comtrade, Intracen, IMF, Capital Economics (Credit: Capital Economics)

Peach also observed that beyond the overall trade figures, there will be sectors particularly vulnerable to the goods trade ban. One quarter of Israel’s imports from Turkey are iron and steel and related products, while 10-15% are plastics, rubber, cement and ceramics. 

Sources: UN Comtrade, Intracen, Capital Economics (Credit: Capital Economics)

Sources: UN Comtrade, Intracen, Capital Economics (Credit: Capital Economics)

Added Peach: “Overall, it seems likely that the trade ban will cause some impact on Israel, albeit concentrated in sectors such as construction that are reliant on metals and building materials from Turkey.

“The construction sector has been one of the hardest hit since the war started, in part because it relied on workers from the West Bank and Gaza, which has now stopped. Surveys show that new construction activity remained fairly weak at the start of this year too.” 

Israeli construction firms will seek out new suppliers, but this will take time, meaning “it’s hard to make the case for a strong rebound in the construction sector any time soon”, said he analyst.

Looking at food, Israel imports more than 10% of its fresh fruit and 15% of its vegetables from Turkey and a required shift towards more expensive suppliers may put some upwards pressure on food inflation, said Peach.

He concluded: “We doubt this will move the needle as far as monetary policy is concerned, but alongside other inflation risks in the economy it does add to the reasons why the central bank is likely to cut interest rates fairly cautiously this year. It’s looking likely that it may deliver just one more 25bp cut by year-end.”