Bank of Israel drops GDP growth forecast amid prolonged war prediction
GDP impairment is affected by both army reserves mobilization and restrictions on Palestinian laborers, creating supply issues.
Israel's central bank predicted Monday that gross domestic product (GDP) will grow by less than forecast in April, at 1.5% in 2024 and 4.2% in 2025, a decline of 1.3% cumulatively.
The prediction was part of The Bank of Israel’s research department’s July 2024 forecast. This takes Israel’s economy further away from growth in coming years, said Bank of Israel Governor Amir Yaron.
This downward revision partially follows the department’s revised assumption that the intensity and duration of fighting in the Israel-Hamas war may increase.
Generally, the forecast is based on the assumption that the direct impact of the Israel-Hamas war on the economy will continue until the beginning of 2025 but took into account a greater probability of more serious security scenarios, including further extension of the war and an increased intensity.The impairment to GDP is both from the demand and supply side, said the bank. “On the supply side, while fewer reserve soldiers are currently mobilized than at the beginning of the war, reserve mobilization continues to impair the supply of labor in all industries,” it said, adding that restrictions on Palestinian laborers are causing a labor supply problem in the construction industry.
On the demand side, the bank predicted that government spending adjustments aimed at slowing the increase in the debt to GDP ratio would be reflected in slowed public consumption in 2025. The bank also said that increased taxes would likely slow private consumption.
Deficit is expected to drop in September
The budget deficit will be 6.6% of GDP in 2024 and 4.0% of GDP in 2025 the bank predicted. When asked why this is the bank’s prediction given Monday’s announcement that Israel’s deficit currently stands at 7.6%, Yaron said that the deficit is expected to start dropping in September. This expectation is based on the assumption that there will be no deviations in Israel’s defense spending.The Bank of Israel’s monetary committee left the interest rate unchanged at 4.5%, they announced Monday.Citing the war, the bank said that its monetary policy was focused on stabilizing markets and reducing uncertainty.Additionally, Israel’s inflation is at the higher end of the target range, said Yaron, adding that it has increased in the last quarter. He explained that this is part of the reason the committee decided to leave the interest rate unchanged.The forecast found that the inflation rate is expected to be 3.2% in the next four quarters and 2.8% in 2025.The rate of recovery of economic activity has become more moderate in the second quarter of 2024, following a sharp recovery in the first quarter, said the BOI.“The government must take necessary steps even if they are unpopular,” said Yaron, who emphasized the need for a responsible 2025 budget.If the government delays necessary actions, it could contribute to an increased risk premium for Israel, which will harm growth and increase the debt that, ultimately, Israeli citizens will repay, said Yaron.The yield on Israel’s government bonds hit a 13-year high last week, showing that demand for Israel’s debt is declining, forcing the state to pay higher interest rates, and raising concerns about the state of Israel’s government bonds market.
Aaron Katz/Globes/TNS contributed to this report.
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