OECD report: lowers Israeli growth forecast, warns government to 're-prioritize' budget
OECD report: lowers Israeli growth forecast, warns government to 're-prioritize' budget
The OECD’s Global Economic Outlook report has cut its growth forecast for Israel in 2024 by more than half, and sent a sharp message to the government about using the budget to fund the ultra-Orthodox sector and coalition interests.
Israel's government must take into account three key points regarding Israel’s economy from the OECD's Global Economic Outlook report published yesterday. This is amid the extreme economic crisis that the Minister of Finance and the Prime Minister have concocted, articulated first in amendments to the 2023 state budget, and expected to continue in 2024.
The first point concerns Israel’s growth forecast. The OECD lowered the growth forecast for the Israeli economy to 2.3% in 2023 (compared to the previous forecast of 2.9% published in June) and a sharper reduction in the forecast for 2024 to 1.5% (compared to 3.3% in the previous report) due to the October 7 attack and Israel’s subsequent war with Hamas. While the report emphasizes that the economic impact of the conflict is very uncertain and depends on "the scope, scale, and intensity of the conflict itself," they conclude that the impact will be very significant and “the slowdown will be temporary but noticeable."
They also specify the channels through which the stagnation will permeate. "Supply side disruptions due to the security situation and the significant decline in the civilian labor force, together with weakening economic sentiment, will mainly affect private consumption and investment,” the report says, adding that “a drop in tourism will weigh on export growth.”
Another important forecast is related to deficit and debt. Due to the conflict, the OECD expects the deficit to deepen "due to a significant fiscal expansion" of about 4% of GDP on average in each of the years 2023-2025. This includes a deficit of 3.1% of GDP in 2023, 5.2% in 2024, and 4.6% in 2025. And no less important: the debt-to-GDP ratio forecast is slightly above 65% in 2025, compared to 60.5% in 2022. In other words, an increase in debt of NIS 90-100 billion ($24-27 billion) during this period.
The report says this is taking place amid a global environment characterized not by rapid global growth but by stagnation. "Inflation is decreasing, but growth is slowing down. The tightening of monetary policy to deal with inflation (interest rate hikes, etc.) is evident. Despite stronger growth than expected in 2023, the tightening of financial conditions, weakening of international trade, and weakened consumer and business confidence are taking a toll.”
Finance ministry officials and the Bank of Israel must reflect this complex reality to the government - that there are external as well as internal threats to our economic security. There is also a clear warning that these forecasts are only the tip of the iceberg. “Further escalation of the conflict or a prolonged conflict may lead to more severe supply disruptions, a decline in economic and consumer sentiment, and an increase in risk, with much more pronounced effects on economic growth and the government’s financial situation." In other words, the slowdown could also turn into a recession, and budgetary challenges into a real fiscal crisis.
The report emphasizes the budgetary policy path that the government needs to take, and here the message is clear, sharp, and aligns absolutely with what has been said by the budget department, the Bank of Israel, and also from senior Israeli economists who spoke yesterday with Calcalist.
"The fiscal space created after the pandemic (by the previous government) can help provide temporary support to households and companies affected by the war and meet the defense, security and reconstruction financial needs," they said. However, they add that this must occur in tandem with “a new set of priorities for the state budget - including all aspects related to fixed expenditures - based on a re-examination of some of the proposed expenditures from before the war, while maintaining focused spending to strengthen growth, infrastructure, and skills development” in order to "moderate the impact on the government's financial situation.”
The report says that the government must set new budgetary priorities, and cancel funds earmarked for coalition members, including spending that harms growth and efficiency, such as funds for the ultra-Orthodox sector. On this point, they emphasize that "there is a need for labor and education reforms to address demographic challenges and reduce gaps in the labor market,” a clear reference to the ultra-Orthodox. This is not a warning from an Israeli organization, but from one of the most important economic organizations in the world, among the most influential bodies for foreign investors, which is the fuel of Israel’s economic engine - the high-tech industry, of which 80% of the capital invested comes from abroad.
A final point of interest in the report is what will happen after the end of Israel’s war with Hamas. Unlike other foreign bodies like Moody’s, which predicts that the war will actually ease the political crisis, the OECD is very pessimistic about the days after the war. "After the war, domestic political tensions, including the judicial overhaul, may resurface and lead to greater uncertainty." In other words, the OECD is betting that the political crisis will only intensify after the war. Their position on this subject has been the clearest among all international economic bodies and is summed up in one sentence from their report, which says it all: "Maintaining the rule of law is crucial to maintaining solid economic performance."
