Quarterly Economic Forecasts - Third Quarter 2025

Quarterly Economic Forecasts - Third Quarter 2025

Quarterly Economic Forecasts Third Quarter 2025 Research and Monetary Policy Department August 2025

Quarterly Economic Forecasts - Third Quarter 2025 ii © August, 2025 All rights reserved. In case of citation, please refer to this publication as follows: Palestinian Monetary Authority. 2025. Quarterly Economic Forecasts Report - Third Quarter. 2025. For all correspondence, please contact the following address: Palestinian Monetary Authority P.O. Box 452 Ramallah and Al-Bireh Governorate, Palestine Tel: +970 (2) 241-5251 Fax: +970 (2) 241-5310 Email: info@pma.ps Website: www.pma.ps

Quarterly Economic Forecasts - Third Quarter 2025 iii Executive Summary

This report provides an analysis of the Palestinian economy's performance forecasts for the third quarter of 2025, based on the latest developments at global, regional, and local levels, and their direct implications for economic activity within the baseline scenario. These estimates are based on a comprehensive analysis of a group of economic and financial indicators under a local environment characterized by instability and political uncertainty.

The forecasts for this quarter reflect a decline in economic dynamics in the Gaza Strip, which remains in a state of near-total paralysis following the second phase of the ceasefire agreement. In the West Bank, strict restrictions on the movement of people and goods continued, alongside a shekel surplus crisis, a slowdown in credit facilities, and a decline in external remittances, particularly to Gaza. Regarding public finance, financial pressures continued due to ongoing deductions from clearance funds and a decline in local revenues, under the absence of an effective international response to fill the funding gap.

In terms of economic growth, the growth rate is expected to slow to approximately 1.7% during the third quarter of 2025, compared to 4.3% in the second quarter and 9.1% in the first quarter of this year. This slowdown reflects the continuation of economic stagnation. Private consumption is expected to decline by 3.0% due to declining income and weak purchasing power. On the demand side, government consumption recorded a decline of 2.8% due to financial pressures. Gross investment also declined by 0.7% due to the absence of new expansionary investments. Although exports grew by 5.0%, the decline in imports by 8.5% resulted in a negative contribution to GDP growth of -15.6%.

On the supply side, growth is concentrated in a limited number of sectors, notably: Agriculture (11.8%), Trade (7.1%), and Industry (6.1%). Regarding inflation, the inflation rate is expected to reach approximately 42.3% during the third quarter, compared to 45.3% in the second quarter, reflecting the persistence of prices at very high levels. This level of inflation is attributed to the continuation of the siege on the Gaza Strip, acute shortages in the supply of goods, disruptions in supply chains, and rising costs of fuel and food materials. These data indicate the continued imbalance between supply and demand at levels beyond control, under the limited availability of local intervention tools.

Quarterly Economic Forecasts - Third Quarter 2025 iv Economic Growth

The most important factors affecting the performance of the Palestinian economy:

Source: Prepared by the Research Team at the Palestinian Monetary Authority.

Private Consumption Monetary Policy Israeli Workers Wages and Salaries Credit Facilities Remittances from Abroad Government Spending Deficits and Surpluses External Factors (Trade Movement Obstacles)

Quarterly Economic Forecasts - Third Quarter 2025 v Contents

Executive Summary ............................................................................................. iii Global Economic Developments and Outlook .................................................. 1 Regional Economic Developments .................................................................. 3 Local Economic Developments ....................................................................... 6

1. Growth Estimates for the Second Quarter of 2025 ................................. 7
2. Economic Forecasts for the Third Quarter of 2025 ................................. 8 a) Growth Rate .......................................................................................... 9 b) Inflation Rate ...................................................................................... 12 Appendix: Economic Forecasts for the Quarters of 2025 ........................... 16

Quarterly Economic Forecasts - Third Quarter 2025 1 Global Economic Developments and Outlook

The global economy witnessed a gradual recovery during 2024 from the consequences of the lingering crises, with improvements in inflation rates and labor market stability in many countries, contributing to the entry of some key economic indicators into a phase of relative stability. However, this recovery entered a new phase of tension and ambiguity in 2025. Since the first quarter of the year, the United States has launched a wave of tariffs targeting most of its trading partners, leading to similar reactions from several countries, most notably China, the European Union, and Canada.

These tensions have contributed to deepening uncertainty regarding the future of the global trading system and increased fears associated with a broad economic slowdown. Estimates issued by the International Monetary Fund (IMF) indicate that the global economy will witness a noticeable slowdown, with the growth rate expected to decline to 2.8% during 2025 compared to 3.3% in 2024, with a limited improvement to 3.0% in 2026. These levels remain below the average recorded before the COVID-19 pandemic, reflecting the negative impacts of trade tensions and weak investor and consumer confidence. Protectionist measures and retaliatory actions have disrupted trade flows and weakened expectations related to consumption and investment.

Regarding advanced economies, the growth rate is expected to decline to 1.4% in 2025 compared to 1.8% in the previous year, with a slight improvement to 1.5% in 2026. The United States was expected to see growth slow to 1.8%, driven by a decline in private consumption and the repercussions of new trade policies on the business and investment environment. The Eurozone is expected to continue its weak performance, with a growth rate not exceeding 0.8% due to a decline in household spending and the continuation of industrial crises in major countries.

Table 1: Major Economies (Percentage %)

Indicator	2024	2025	2026*
Global Economy	3.3	2.8	3.0
Advanced Economies	1.8	1.4	1.5
United States	2.8	1.8	1.7
Eurozone	0.9	0.8	1.2
Japan	0.1	0.6	0.6
Emerging and Developing Economies	4.3	3.7	3.9
China	5.0	4.0	4.0
India	6.5	6.2	6.2
Russia	4.1	1.5	0.9
Middle East and Central Asia	2.4	3.0	3.5

• IMF World Economic Outlook forecasts, April 2025. ** Economic Trading database forecasts.

Quarterly Economic Forecasts - Third Quarter 2025 2 Some economies within the bloc, such as Spain, may benefit from positive internal factors supporting relatively higher growth rates. The Japanese economy is expected to record growth of approximately 0.6%, driven by wage improvements and domestic demand, despite existing external challenges.

Emerging and developing economies, which recorded growth of 4.3% in 2024, are expected to decline to 3.7% in 2025, with a potential slight improvement in 2026 to modest performance. This slowdown is partly attributed to the Chinese economy, which faces ongoing repercussions of the real estate crisis and weak consumer spending, with growth expected to decline to 4.0% despite policies in place, given the continued trade tensions with the United States. India, holding a prominent position among the fastest-growing economies, will also be affected by global volatility, with its growth expected to decline to 6.2%. The Russian economy is expected to experience a sharp decline to 1.5% due to the continuation of internal and external economic restrictions, with prospects for further slowdown in 2026.

The Middle East and Central Asia region is expected to record relatively moderate growth of 3.0% in 2025, driven by relative stability in the export environment, despite the continuation of oil price fluctuations and improvements in some countries, fueled by relative stability in geopolitical tension risks and limited economic diversification.

Regarding prices, the global inflation rate reached 5.7% in 2024, with expectations for it to decline to 4.3% in 2025 and then to 3.6% in 2026, driven by services and basic goods prices, including food and energy. Prices are likely to remain high in some advanced economies, while the pace of decline may be faster in some developing economies due to weak domestic demand and tightening monetary policies.

Under this volatile global environment, challenges for policymakers are increasing, with fiscal and monetary policy space becoming narrower due to high public debt levels and increasing fragility in some developing countries. The rise in uncertainty regarding economic conditions has contributed to weakening growth expectations and threatening near-term macroeconomic and financial stability, making it difficult to predict the direction of geopolitical and financial developments.

Quarterly Economic Forecasts - Third Quarter 2025 3 Regional Economic Developments

Economic developments in the region varied during 2025, with each country affected by global and internal variables, including geopolitical tensions, security situation repercussions, and adopted economic policies.

The Israeli economy is estimated to be in a phase of gradual slowdown during 2025, due to the continuation of the economic war on the Gaza Strip and a slowdown in the recovery pace. The annual growth rate declined to approximately 2.7% in the third quarter of the year, compared to 2.9% in the second quarter, affected by weak domestic consumption and the absence of new fiscal stimulus due to austerity policies. The unemployment rate is expected to rise slightly to 3.2%, while inflation is expected to remain stable at 3.2%, driven by food and fuel prices and supply chain disruptions, despite restrictions on Palestinian labor entry.

In the second quarter, economic growth was 2.9% compared to 3.4% in the first quarter, reflecting a slight decline in momentum achieved following the temporary ceasefire agreement. Unemployment then declined to 3.1%, while inflation declined to 3.1% due to weak consumption and reduced supply chain bottlenecks. In the first quarter, growth was 3.4% after recording 5.8% in 2024, supported by the business environment and the return of some reserve soldiers to the labor market, while unemployment rose to 3.2% and inflation reached 3.5% due to rising prices of basic goods and transport.

These indicators reflect the entry of the Israeli economy into a clear slowdown cycle, characterized by a relative increase in the business environment, declining unemployment rates, and continued inflationary pressures, reflecting a state of uncertainty regarding future economic capacity.

Regarding fiscal policy, the Bank of Israel expects the fiscal deficit to reach 4.9% of GDP in 2025, with public debt stabilizing at 70% of GDP, due to increased military spending.

Geopolitical and trade risks are among the most prominent challenges facing the Israeli economy, affecting revenue growth and the economy's ability to regain momentum. However, annual growth is expected to reach 3.3% in 2025 and 4.6% in 2026, with an expected improvement in the construction sector, investment, exports, and activity in the security environment and financial disorder control.

Quarterly Economic Forecasts - Third Quarter 2025 4 Regarding the Jordanian economy, the 2025 data showed a relatively stable performance with resilience, supported by the overall economy, progress in infrastructure projects, and an improved investment climate. The growth rate is expected to reach 2.8% in the third quarter, the same level recorded in the second quarter, supported by the continuation of productive sector activity, rising external remittances, and increased credit facilities.

Conversely, the unemployment rate is expected to decline to 21.0% in the third quarter, the lowest level during the year. The inflation rate is expected to stabilize at 2.1% due to seasonal pressures on food and service prices. In the second quarter, unemployment reached 23.4%, reflecting continued challenges in some sectors. Inflation then recorded 1.9% due to stable energy and basic goods prices.

In the first quarter, the economy grew by 2.7%, benefiting from improvements in agriculture, manufacturing, electricity, and water sectors. Foreign reserves remained at a safe level of $22.8 billion, while inflation stayed within safe limits at 2.0%, and unemployment remained high at 21.3%.

Quarterly Economic Forecasts - Third Quarter 2025 5 These indicators support the IMF's annual forecast for 2025 of a growth rate of 2.7%, with the continuation of monetary stability, structural reforms, and international support.

On the other hand, the Egyptian economy showed positive signs during 2025 despite ongoing structural challenges. Growth is expected to reach 4.0% in the third quarter, supported by the recovery of exports and investments, with private investments accounting for 62% of total investments according to the Ministry of Planning data. The unemployment rate is expected to decline to 6.4%, while inflation is expected to rise to 16.0% due to seasonal pressures on food and energy prices.

In the second quarter, growth slowed slightly to 3.9%, while unemployment rose to 6.7%, reflecting continued pressures on the labor market. However, inflation continued to decline to 15.2% due to monetary tightening and exchange rate stability, in addition to improved performance of exportable sectors such as manufacturing and ready-made garments.

In the first quarter, the economy recorded growth of 4.8%, the highest in three years, compared to 4.3% in the last quarter of 2024. This growth was driven by improvements in tourism (23%), manufacturing (16%), and telecommunications (14.7%). Net exports contributed to growth at a rate of 2.7%, accompanied by a decline in annual inflation to 16.8% from 25.4% in the previous quarter, with unemployment stabilizing at 6.3%. Despite this improvement, challenges remain, including a 45.6% decline in public investment in some quarters, a slowdown in the extractive industries sector, and a 23.1% decline in Suez Canal revenues. The government seeks to reduce reliance on rentier sectors and strengthen local industry and production chains.

The IMF expects the annual growth rate in Egypt to reach 4.1% in 2025 compared to 2.7% in 2024, supported by expanding the local production base, improving the investment environment, and continuing structural reforms, enhancing the resilience of the overall economy.

Quarterly Economic Forecasts - Third Quarter 2025 6 Local Economic Developments

Data from the Palestinian Central Bureau of Statistics showed that real GDP registered annual growth of 9.1% in the first quarter of 2025 compared to the same period in 2024. Although this represents the best economic performance in recent years, the increase requires looking at two main factors to explain this growth.

First, most of this growth is due to the low base effect, as the first quarter of 2024 was one of the worst in recent years, where GDP contracted by 34.9% due to the Israeli aggression on the Gaza Strip and its aftermath, which led to near-total paralysis in both Gaza and the West Bank. Consequently, the recorded rise in economic activities in the first quarter of 2025 reflects a statistical recovery rather than a genuine economic recovery.

Second, the Gaza Strip witnessed a relative improvement in some basic economic activities, particularly agriculture, trade, and services, following the entry into the first phase of the ceasefire agreement implementation. This agreement provided a limited margin for economic movement and the flow of some goods and humanitarian aid, thereby reducing inflationary pressures and stimulating local consumption.

The atmosphere of détente also had a positive impact on the West Bank, where a degree of relative stability prevailed, stimulating economic activity in trade and services sectors. However, the economy remains fragile due to widespread infrastructure damage and severe restrictions on movement and trade.

Gaza continues to face a severe crisis due to declining public revenues, continued Israeli deductions from clearance funds, and weak external assistance, which limited its ability to implement stimulating policies. Thus, the growth recorded in the first quarter of 2025 was largely due to the comparison with a disastrous quarter, with limited contribution from the ceasefire under the absence of a comprehensive recovery plan amidst ongoing financial and security challenges.

Quarterly Economic Forecasts - Third Quarter 2025 7 In light of these data, the Central Bureau of Statistics data, as shown in Figure 4, indicated positive growth in most components of aggregate demand in the first quarter of 2025, compared to wide contractions in the last quarter of 2024. Private consumption rose by 9.8% due to relative stability in the West Bank, temporary improvement in purchasing power, and the entry of aid and declining prices during the ceasefire. Government consumption recorded growth of 16.1%, continuing emergency spending despite funding restrictions on basic services and social support programs. Gross investment grew by 10.1%, reflecting partial movement in the West Bank, particularly in construction and industry, while Gaza remains in a state of complete investment paralysis.

Regarding foreign trade, exports maintained a strong growth rate of 13.3%, close to the previous quarter's rate (13.6%), indicating limited improvement in exportable sectors. Conversely, imports rose significantly by 21.6% compared to a decline of 9.6% in the previous quarter, reflecting an improvement and increased flow of goods, but leading to a widening of the trade deficit and a decline in the contribution of net exports to growth.

Data indicate that the growth recorded in the first quarter of 2025 generally reflects a partial recovery, as it is the result of an unbalanced recovery dominated by temporary and statistical effects rather than structural economic improvement. Under the continuation of the fragile security environment, deteriorating financial conditions, and difficulty in reactivating lagging sectors, especially in Gaza, the Palestinian economy still lacks a solid structure capable of supporting sustainable growth.

1. Growth Estimates for the Second Quarter of 2025

Estimates issued by the Palestinian Monetary Authority indicate a noticeable slowdown in economic growth during the second quarter of 2025, with real GDP expected to register annual growth of 4.3% (Figure 5).

Figure 5: Estimated Growth, Second Quarter 2025 Source: Palestinian Central Bureau of Statistics - 2024 Q1 - 2025 Q2 Estimates by the Palestinian Monetary Authority.

This decline compared to 9.1% in the first quarter of the same year is not a natural corrective movement after the beginning of the year, but clearly reflects the fragility of the recovery and the continuation of structural constraints on the strong performance of the Palestinian economy.

This slowdown is primarily linked to the escalation of challenges in the West Bank, where tightened Israeli restrictions on the movement of people and goods, and the continued prevention of the entry of large numbers of Palestinian workers into Israel, have undermined productive and commercial activity. The financial crisis facing the Palestinian Authority, due to continued deductions from clearance funds and a sharp decline in local revenues, has also weakened the government's ability to finance current expenditures and inject the necessary liquidity to stimulate the economy.

In the Gaza Strip, despite the entry into the first phase of the ceasefire agreement implementation, the resumption of military operations at the beginning of the year limited the impact of recovery opportunities on the Palestinian GDP, given the small size of Gaza's contribution. Consequently, the economic slowdown recorded in the second quarter is primarily attributed to the continuous deterioration in the West Bank, the erosion of government capacity, and the continuation of an unstable business and investment environment.

These data confirm that the high growth recorded in the first quarter was not sustainable, relying on temporary factors that, once dissipated, exposed the Palestinian economy's weakness in withstanding shocks without structural reforms and stable funding sources.

2. Economic Forecasts for the Third Quarter of 2025

The economic forecasts issued by the Palestinian Monetary Authority included an evaluation of the baseline scenario, in addition to an analysis of fluctuations and potential risks within alternative optimistic and pessimistic scenarios, to identify possible positive or negative impacts in the short term. These forecasts were based on advanced economic models developed by the Monetary Authority, including the main formula model and financial modeling models, which take into account a group of supply and demand macroeconomic indicators.

Quarterly Economic Forecasts - Third Quarter 2025 9 (End of Document)