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 2
OECD Economic Outlook
Israel
Economic growth is projected to ease slightly, but will remain close to 3% in 2020 and 2021. The global slowdown is weakening exports, and private consumption growth will moderate as the labour market cools slightly, but low interest rates and the start of gas exports will support activity. Inflation will rise slowly towards the lower half of the Bank of Israel’s 1‑3% target range.
Fiscal policy tightening is needed to bring debt back on a downward trajectory and ensure room for manoeuvre should downside risks materialise. The accommodative monetary stance is appropriate and the authorities should wait until inflation is entrenched in its target range before gradually raising interest rates. Intensifying structural reforms, especially to improve skills of the Ultra-Orthodox and Israeli-Arabs and align them with labour market needs, is crucial to lower the large social disparities and boost productivity.
Growth remains robust
Growth remains robust and close to the potential rate. Industrial production remains resilient and consumer credit card purchases continue to expand at a healthy rate. Business and consumer confidence remain solid despite prolonged political uncertainty. Exports have been holding up well despite the rising shekel and global trade slowdown due to strong performance in tourism and high‑tech services.
Labour market and consumer price inflation: Israel
1. Shaded area is the Bank of Israel's inflation target range.
Source: OECD Economic Outlook 106 database; Bank of Israel; and CBS Israel.
Israel: Demand, output and prices
The labour market remains tight with the unemployment rate near its historical low, although the job vacancy rate has been declining moderately from high levels. Despite strong wage growth, inflation has fallen back below the lower bound of the target band. This is mainly due to volatile food and vegetable prices and a sharp decline in tradable goods inflation owing to lower energy prices and strong shekel appreciation.
Fiscal prudence is needed
The Bank of Israel has kept its policy rate at 0.25% since November 2018. Amid low inflation, shekel appreciation, heightened uncertainty about the global outlook and monetary easing in the United States and the euro area, the authorities have signalled that they will leave the policy rate at the current level for an extended period or reduce it until inflation is sustainably back in the target range. With the expected moderate rise in inflation, a gradual increase in the policy interest rate is included in the projection from the first quarter of 2021.
The general government budget deficit increased markedly from 1.1% of GDP in 2017 to a projected 4.1% of GDP in 2019, as strong increases in expenditures coincided with the lowering of some tax rates. With the economy at full employment, the new government should focus on preserving fiscal margins while allowing for spending to enhance social cohesion and productivity. This will require higher tax revenues, preferably by cutting inefficient tax exemptions and increasing environmental taxes, including by introducing congestion charges. Savings on the expenditure side can be generated for example by increasing the retirement age of women to that of men. Policy action in these areas would bring the budget deficit to more sustainable levels. Fiscal prudence should be accompanied by stepping up structural reforms to improve infrastructure, particularly in public transport, boost competition in sheltered sectors and enhance training and education, especially in Israeli‑Arab and Ultra‑Orthodox communities.
Growth will ease slightly
Growth is projected to ease slightly in 2020 and 2021. Domestic demand growth will slow as the labour market cools, fiscal stimulus fades, and uncertainty from trade tensions weigh on investment. The assumed moderate recovery in export markets over the coming two years and the start of gas exports to Egypt will improve the trade balance and support the economy. Growth could be stronger if a faster‑than‑assumed development of the gas fields further reduces energy imports or boosts exports. In contrast, continued shekel appreciation and heightened geopolitical tensions would hurt growth. Domestic demand could slow more quickly if the new government takes necessary consolidation measures, which are not factored into the baseline projection.