The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the west Bank under the terms of international law.
OECD Economic Outlook, Volume 2019 Issue 1
OECD Economic Outlook
Israel
Economic growth is projected to ease slightly, but will remain strong at around 3% in 2019 and 2020. While the global slowdown is weakening export market expansion in the near term, the still strong labour market, low interest rates and expansionary fiscal policy will support domestic demand. Inflation will rise but remain within the lower half of the Bank of Israel’s target range.
Some macroeconomic policy tightening will be needed to meet fiscal and longer-term inflation targets, and to ensure room for manoeuvre should downside risks materialise. To be able to respond to investment needs in infrastructure and education and foster more inclusive growth, the government should renew its efforts to enhance efficiency in the public sector and improve the tax structure to increase revenues.
The economy is growing close to its potential rate
Growth has remained strong, driven by robust non-residential investment and private consumption. Industrial production rebounded and business confidence improved at the beginning of the year. The labour market is close to full employment but shows some signs of cooling. Job creation in the business sector is slowing, and the job vacancy rate is falling slightly from high levels.
On the back of strong wage growth, non-tradables prices have jumped, and headline inflation has picked up, surpassing the lower bound of the central bank’s 1-3% inflation target in the second half of 2018. Services exports continue to grow solidly, and the weakness in goods exports has eased somewhat thus far in 2019, narrowing the trade deficit.
Labour market and consumer price inflation: Israel
1. Shaded area is the Bank of Israel's inflation target range.
Source: OECD Economic Outlook 105 database; Bank of Israel; and CBS Israel.
Israel: Demand, production and prices
Prudent fiscal policy must be maintained, while promoting more inclusive growth
Government expenditure commitments, which include higher spending on infrastructure, welfare and housing, will boost growth in 2019. Unless additional consolidation measures are taken, which are not factored into the projection, the budget deficit will increase markedly to well beyond the government’s targets for 2019 and 2020, set at 2.9% and 2.5% of GDP respectively. With the economy close to full employment, the new government should focus on preserving fiscal margins and meeting the budget deficit targets. This will require restraining spending, including by promoting efficiency, and increasing tax revenues, preferably by reducing tax expenditures, such as VAT exemptions on fruits and vegetables and tourism. The Bank of Israel raised its policy rate for the first time in almost four years from 0.1% to 0.25% in November 2018. With inflation back in the Bank’s target range, still low unemployment and a positive output gap, a further gradual increase in the interest rate would be appropriate.
Structural reforms are needed to boost productivity and reduce Israel's still wide socio‑economic inequalities. This entails pursuing product market reforms to foster competition in lagging sectors and promoting more business-friendly regulations as well as improving the skills, educational attainment and incentives to work of disadvantaged groups whose population shares will continue to increase. Policies to narrow the relatively large regional disparities between municipalities should also be pursued, for example by modifying the inter-governmental and inter-municipal fiscal framework and shifting central budget allocations to support schools and services in disadvantaged municipalities.
Growth is projected to ease slightly
Domestic demand growth will gradually ease as labour market tightness stabilises and higher interest rates weigh on consumption and investment growth. A moderate recovery in export markets over the projection horizon, the development of the offshore gas fields, and new production facilities in the high‑tech sector will improve the trade balance and support the economy. A rise in regional geopolitical tensions and prolonged political uncertainty following the recent elections are downside risks to activity. Growth could be stronger if a faster-than-assumed development of the gas fields accelerates the recovery of exports.