OECD cuts Israel’s growth forecast

The Organization for Economic Cooperation and Development says the Israeli economy will grow by 1.9% in 2024 and 4.6% in 2025 in its latest report on the global economy. Before the war, the OECD forecast economic growth of 3.3% this year in Israel. The OECD's latest forecast is lower than the Bank of Israel's forecast for annual economic growth of 2% for 2024 and 5% in 2025 but higher than the IMF's forecast of 1.6% growth in Israel this year and lower than the IMF's forecast of 5.4% growth next year. .

Despite the ongoing war in Gaza and on Israel's northern border, the OECD notes that “strong private consumption will remain a powerful driver of growth alongside war-related government needs.”

The construction industry has been hit hard

OECD forecasts describe the negative impact of the war on the Israeli economy, and underscore the damage to the construction industry due to the shortage of foreign workers. The OECD believes that the volume of new housing construction in Israel fell by 53% in the last quarter of 2023, and expects only a partial recovery in 2024.

The report adds that inflation in Israel has been very moderate since price levels reached their peak (5.4% in January 2023), and inflation is expected to reach 2.5% in 2024 (compared to the Bank of Israel’s forecast of 2.7%). According to the OECD, inflation will remain at this level in 2025 and will enable the Bank of Israel to cut the interest rate to 3.75% (from 4.5% today) next year.

Regarding fiscal policy, the report points positively to a rise in value-added tax to 18% in 2025. The report says: “Along with the cost of war, the cost of defense is expected to rise permanently, by at least 0.5% of GDP. The Organization for Economic Cooperation and Development expects the state budget to achieve the government deficit target of 6.6%.

The OECD believes that in addition to reducing spending, Israel must implement reforms that will maintain GDP growth. The report urges “the need to reduce programs that weaken incentives to enter the labor market.”

The report also recommends avoiding budget cuts that could hurt future growth, such as the education budget, which is particularly important in light of Israel's growing demographics and the economy's dependence on the technology sector.

Published by Globes, Israel Business News – en.globes.co.il – on May 2, 2024.

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