Ministry of Finance chief economist Shira Greenberg released an updated macro forecast today in which she reduces expected GDP growth and state revenues.
According to the revised forecast, Israel’s economy will grow by 2.7% in 2023, which compares with 3% growth in the previous forecast published in January. The current estimate for state revenues is NIS 463.6 billion, NIS 5.3 billion less than in the previous forecast.
The updated forecast assumes that the judicial overhaul legislation will not be passed in its original form. The possibility that it will is presented as one of the risks to the forecast and as liable to lead to a worsening of the figures. Either way, the Ministry of Finance has priced in the cost of the uncertainty surrounding the legislation. Among other reasons for the more pessimistic forecast is the global economic slowdown, particularly among Israel’s main trading partners, in Europe and the US.
Larger deficit
The expected decline in state revenues will mean a larger fiscal deficit. The state budget due to be approved next week is built on the assumption of a very low deficit, of 0.8-0.9% of GDP in 2023 and 2024. According to the new forecast, the deficit will grow to 1.1% of GDP this year and 1.35% next year.
This is still substantially lower than the deficit forecast by market analysts. Their consensus estimate is of a deficit of 2.5-3.5% of GDP.
The 2023-2024 two-year budget was approved by the government in February on the basis of a revenues forecast NIS 16.2 billion higher than the newly released forecast. The decline is mainly in 2024, when revenues are now expected to be NIS 11 billion less than originally forecast. In nominal terms, state revenues are expected to be 0.9% lower this year than last year.
The Ministry of Finance stresses that in the light of the signs of economic slowdown, chiefly in the technology and real estate sectors, it is especially important to maintain fiscal restraint. "Most of the risks to the forecast are on the downside, and the probability that they will materialize is higher in this forecast. It is therefore important to keep fiscal room that will make it possible to cope with future changes in the growth forecast," Greenberg writes.
Higher inflation forecast
The chief economist’s forecast holds no good news on inflation either. The forecast has been revised upwards by 0.4% to 3.2% for this year and by 0.2% to 2.9% for next year.
In fact, the inflation forecast could even have been a little higher, in the light of the April CPI reading released yesterday, which was surprisingly high, showing inflation running at 5%, whereas the Ministry of Finance built its forecast on the basis of current annual inflation of 4.9%.
Published by Globes, Israel business news - en.globes.co.il - on May 16, 2023.
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