OECD undercuts Treasury growth forecasts

Minister of Finance Bezalel Smotrich credit Noam Moskovich Knesset Spokesperson
Minister of Finance Bezalel Smotrich credit Noam Moskovich Knesset Spokesperson

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.

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.

© Copyright of Globes Publisher

Minister of Finance Bezalel Smotrich credit Noam Moskovich Knesset Spokesperson
Minister of Finance Bezalel Smotrich credit Noam Moskovich Knesset Spokesperson
Tel Aviv Stock Exchange credit: Shutterstock TASE tumbles in Wall Street's wake

Dual-listed stocks have again been hard hit, but the banks are also down sharply.

Donald Trump and Benjamin Netanyahu credit: Avi Ohayon Netanyahu due in Washington to discuss tariffs

According to news website Axios, Prime Minister Benjamin Netanyahu will be the first leader to meet President Trump after the latter's announcement of sweeping import tariffs.

Yoni Assia CEO eToro Credit: PR eToro defers IPO amid market turmoil

The online trading platform had planned to begin meetings with investors this week.

Minister of Finance Bezalel Smotrich credit: Shlomi Yosef Smotrich meets wrong man in Washington

Minister of Finance Bezalel Smotrich tried to persuade Secretary of the Treasury Scott Bessent to soften the tariff blow on Israel - only Bessent isn't responsible for the matter.

Unframe founders credit: Yossi Yarom Israeli AI enterprise platform co Unframe raises $50m

Unframe’s turnkey AI solutions enable companies to solve any enterprise AI use case at scale with fully functional, customized AI solutions for businesses in a matter of hours, rather than months.

Combatica credit: Combatica Combatica launches next-gen VR AI training platform

The Israeli company's virtual reality platform includes 50 AI generated scenarios, seven maps and even situations for operating night vision.

Shekel credit: Shutterstock Vladirina 32 Shekel volatility after US tariffs announcement

The shekel is weakening sharply against the euro, which is gaining following the unveiling of Donald Trump's tariffs plan.

Minister of Finance Bezalel Smotrich credit: Noam Moskovitz Knesset Spokesperson Treasury assesses potential damage to Israel's US exports

Israel will be charged a higher tariff on its exports to the US - its biggest export customer - than Turkey and the UAE.

Iranian flag credit: Shutterstock Why inflation haunts Iran

With a month-on-month increase of 3.3% and an annual rate of 37.1%, inflation reflects the struggles of millions of Iranians.

APM merges with lawyers from Doron, Tikotzky Kantor, Gutman credit: Eyal Merilos APM merges with 12 lawyers from Doron, Tikotzky Kantor, Gutman

With the addition of these 12 lawyers, Amit Pollak Matalon & Co. will now have 135 lawyers.

US President Donald Trump credit: Reuters Sipa USA Israel on list as Trump unveils tariffs

Relatively low reciprocal tariffs will be imposed on Israeli goods sold in the US.

Deflated unicorn credit: Shutterstock Big Tech 50 reports more huge falls in startup valuations

Israeli R&D partnership Big Tech 50 reports that an investment of $2 million in Orcam made in 2021, shrank to just $31,000 at the end of 2024.

NextFerm technologies based on yeast credit: NextFerm Food-tech co NextFerm suspends operations

The company, which produces food ingredients in yeast without genetic engineering, cannot pay its debts and is seeking a buyer.

Minister of Finance Bezalel Smotrich credit: Shlomi Yosef OECD sees recovery in growth but high inflation

The OECD Israel Economic Survey 2025 recommends that the Israeli government take several restraining measures, in order to exit the economic storm created by the war.

Dano Ben-Hur credit: Dror Sithakol Statisticians contradict BoI on housing finance deals

The Central Bureau of Statistics insists the impact of 20/80 buy now pay later financing deals on the real estate market and housing prices is minimal.

Governor of the Bank of Israel Amir Yaron  credit: Government Press Office Debt fears top Bank of Israel's concerns

Most unusually, Governor of the Bank of Israel Amir Yaron's press conference last week did not focus on inflation and the impending interest rate decision.

Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018