The Organization for Economic Cooperation and Development issued its semi-annual report on the state of the global economy, and revised its growth forecasts for Israel downward. The new forecasts are more pessimistic than the expectations of the Bank of Israel and the Ministry of Finance regarding growth and fiscal deficit.
The Organization for Economic Cooperation and Development lowered its growth forecast for Israel in 2024 to only 0.6%, from 1.9% in its previous forecast. This is in line with more conservative forecasts in Israel. However, the OECD also expects lower growth in the coming years: 2.4% in 2025, compared to the Bank of Israel’s forecast of 3.8%, and 4.4% from the Ministry of Finance.
The OECD expects greater growth of only 4.6% in 2026. This means that Israel’s GDP will not return to its pre-war growth levels next year.
The OECD is also not optimistic about the fiscal deficit. While the Ministry of Finance estimates that the deficit next year will reach 4.4% of GDP, thanks to a package of budget adjustments and austerity measures, the Organization for Economic Cooperation and Development indicates a much higher deficit of 5.7% of GDP. Total.
The OECD believes that Israeli interest rate policy remains stable, with no changes imminent. This means that Israel will not join the global trend of lower interest rates. The inflation rate in 2025 is expected to reach 3.5-3.6%, which is above the upper end of the Bank of Israel’s target range of 1-3%. The organization points to supply constraints resulting from the war as contributing to inflation.
“Economic conditions have been severely affected by conflicts,” the OECD report said. It also underscores the impact of the conflict on Israel’s fiscal situation: “After a strong boost with the budget balance shifting from surplus in 2022 to an estimated 7.5% of GDP deficit in 2024, fiscal policy is scheduled to tighten in 2025-2026.” More than 2% of GDP.
The report also indicates a downgrade of Israel’s credit rating by the three international rating agencies. On the positive side, the report notes that the stock market has seen an almost complete recovery, and the fact that business confidence has become stronger, with moderate optimism from respondents overall.
The OECD warns that risks remain high. “The risks are very high. On the downside, a renewed intensification of conflicts could significantly deteriorate public accounts while directly depressing activity. A loss of foreign investor confidence could lead to further increases in government bond yields and a test of the currency’s value.”
On the other hand, the report also sees positive possibilities for reducing conflict: “Accelerating the pace of de-escalation could unleash pent-up foreign and domestic private demand, leading to a much faster-than-expected recovery and improvement in the economy.” Financial accounts,” the report states.
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The OECD report calls for caution in its recommendations. “Monetary policy must remain prudent. With inflation expectations approaching the top of the 1% to 3% target range, further interest rate increases will become necessary if implementation of fiscal consolidation plans is limited or if price pressures build stronger than expected.” “.
The report also reiterates recommendations from previous Israel surveys: “The government should favor permanent fiscal reforms, such as removing exemptions from value-added tax, and cutting subsidies that encourage remaining out of the labor market, over measures that are likely to be rolled back, such as taxes.” “. – Freeze the arc or wildcard level.
“Ending the suspension of Palestinian work permits would address labor shortages in the construction sector. Removing subsidies that discourage work among religious men while ensuring that all pupils learn the basic curriculum would expand employment opportunities and improve labor productivity. Higher carbon pricing would Accelerates decarbonisation.”
Published by Globes, Israel Business News – en.globes.co.il – on December 4, 2024.
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