The OECD says that Israel's economy will grow by 1.9% in 2024 and 4.6% in 2025 in its latest report on the global economy. Prior to the war the OECD had predicted 3.3% economic growth this year in Israel. The latest OECD prediction is lower than the Bank of Israel's annual economic growth forecast of 2% for 2024 and 5% in 2025 but above the IMF's forecast of 1.6% growth in Israel this year and below the IMF's prediction of 5.4% growth next year.
Despite the ongoing war in Gaza and on Israel northern border the OECD cites, "Strong private consumption that will continue to be a strong engine of growth together with the government needs related to the war.'
Construction industry hit hard
The OECD's forecast describes the negative impact of the war on the Israeli economy, and stresses the damage to the construction industry due to the lack of foreign workers. The OECD believes that the scale of new housing construction in Israel fell 53% in the last quarter of 2023, and it sees only partial recovery in 2024.
The report adds that inflation in Israel has been very moderate since the peak in price levels (5.4% in January 2023), and sees 2.5% inflation in 2024 (compared with 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) in the coming year.
In terms of fiscal policy, the report notes positively the rise in VAT to 18% in 2025. The report says, "Beyond the cost of the war, the cost of defense is expected to rise permanently, by at least 0.5% of GDP." The OECD expects the state budget will meet the government's 6.6% deficit target.
The OECD believes that in addition to curbing spending, Israel must carry out reforms that will maintain GDP growth. "Programs that weaken the incentives to enter the job market must be cut," the report urges.
The report also recommends avoiding budget cuts that could harm future growth, like the education budget, which is especially important in light of Israel's growing demographics and the economy's dependence on the tech sector.
Published by Globes, Israel business news - en.globes.co.il - on May 2, 2024.
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