By Steven Scheer
JERUSALEM (Reuters) - Israel's economy contracted for the first time in more than five years in the third quarter, as growth was hit by the effects of a war with Islamist militants in Gaza.
Gross domestic product fell 0.4 percent in the July-September period, the Central Bureau of Statistics said on Sunday. It was the first quarterly decline since a 0.2 percent drop in the first three months of 2009, at the outset of the global financial crisis.
Growth for all of 2014 is projected at 2.2 percent, with Israel's 50-day war in July and August having shaved off about half a percentage point.
Third-quarter GDP was forecast to have dipped 0.1 percent, according to a Reuters poll of analysts.
The Bank of Israel had previously said growth in the quarter was likely to be zero or negative, due to the war - a time when many factories had sharply curtailed activity amid heavy rocket fire from Gaza while consumers opted to stay home.
To offset the expected weakening of economic growth, coupled with a shift to deflation, the central bank had lowered its benchmark interest rate by a combined half-point in July and August to an all-time low of 0.25 percent. Policymakers left the key rate unchanged at its two subsequent meetings.
Exports, which account for some 40 percent of economic activity, rose 2.8 percent in the third quarter. Private spending, another key driver, grew 3.9 percent while investment in fixed assets slipped 3.6 percent.
Government spending increased 3.1 percent and imports surged 16.2 percent.
Excluding public sector spending, the economy contracted 1.4 percent in the third quarter.
The bureau also revised its estimate for second-quarter GDP to 2.2 percent from a prior 1.9 percent.
On Friday, it said Israel's annual inflation rate held steady at -0.3 percent in October. Israel moved to deflation in September for the first time since 2007.
Tel Aviv stock and bond prices were largely flat on Sunday.
(Reporting by Steven Scheer; Editing by David Clarke and Stephen Powell)