OECD undercuts Treasury growth forecasts

The OECD now sees GDP growth of just 2.4% in Israel in 2025, which compares with a 4.4% projection by the Ministry of Finance.

The OECD has released its semi-annual report on the state of the global economy, and has revised its growth forecast for Israel downwards. The new forecast is more pessimistic than those of the Bank of Israel and the Ministry of Finance on growth and the fiscal deficit.

The OECD has cut its growth forecast for Israel for 2024 to just 0.6%, from 1.9% in its previous forecast. This is in line with the most conservative forecasts in Israel. The OECD, however, also sees low growth in the coming years: 2.4% in 2025, which compares with a forecast from the Bank of Israel of 3.8%, and 4.4% from the Ministry of Finance.

The OECD sees more substantial growth, of 4.6%, only in 2026. That is to say, the Israel’s GDP will not return to its pre-war growth levels next year.

Nor is the OECD optimistic about the fiscal deficit. Whereas the Ministry of Finance estimates that next year’s deficit will be 4.4% of GDP, thanks to a package of budget adjustments and austerity measures, the OECD points to a much higher deficit of 5.7% of GDP.

The OECD sees Israel’s interest rate policy remaining stable, with no imminent changes. That is to say, Israel will not join the global trend of declining interest rates. The inflation rate in 2025 is projected at 3.5-3.6%, higher than the top end of the Bank of Israel’s 1-3% target range. The organization mentions supply constraints resulting from the war as contributing to inflation.

"Economic conditions are deeply impacted by the conflicts," the OECD report states. It also emphasizes the impact of the conflict on Israel’s fiscal position: "After a strong impulse as the budget balance moved from surplus in 2022 to an estimated 7.5% of GDP deficit in 2024, fiscal policy is set to tighten in 2025-26 by over 2% of GDP."

The report also mentions the downgrades of Israel’s credit rating by all three international rating agencies. On the positive side, it notes that the stock market has staged an almost complete recovery, and the fact that business confidence has been stronger, with respondents overall moderately optimistic.

The OECD warns that risks remain high. "Risks are very large. On the downside, a renewed intensification of the conflicts could substantially degrade public accounts while directly reducing activity. Loss of foreign-investor confidence could result in further increases in government bond yields and test the value of the currency."

On the other hand, it also sees the upside possibilities of a reduction in the conflict: "An acceleration of the de-escalation could unleash pent-up foreign and domestic private demand prompting a much-faster-than-projected upturn and improvement in the fiscal accounts," the report states.

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In its recommendations, the OECD report calls for prudence. "Monetary policy needs to remain prudent. With inflation expectations close to the top of the 1-3% target range, further rate increases would become necessary if delivery of fiscal-consolidation plans is limited or price pressures build up more strongly than projected."

The report also repeats recommendations from previous surveys of Israel: "The government should favor permanent fiscal reforms, such as removing VAT exemptions, and reducing subsidies that encourage staying outside the labor market, over measures that are more likely to be reversed, such as tax-bracket or allowance-level freezes.

"Ending the suspension of Palestinians’ work permits would tackle labor shortages in construction. Removing subsidies that discourage work among ultra-Orthodox men while ensuring that all pupils learn the core curriculum would broaden employment and improve labour productivity. Higher carbon pricing would accelerate decarbonisation."

Published by Globes, Israel business news - en.globes.co.il - on December 4, 2024.

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