Israel’s economy will grow by only 2.9% in 2020 and 2021, a very low rate historically, according to the OECD’s economic forecast for Israel published Thursday. A year ago, the organization’s economists predicted that Israel’s economic growth will reach 3.3% in 2020, making the current forecast a sharp cut. Furthermore, a year ago those same economists estimated that 2020 will be a year of temporary recession, but now they are predicting low growth for two years in a row, indicating a change in approach. Beyond the numbers, the message the OECD is sending is that Israel is now entering a period of slow growth. Historically, over the past 25 years, Israel’s average growth was 3.7%. In the past decade it stood at 3.8%.
The silver lining is that a 2.9% growth rate is still high compared to other OECD countries. According to the report, the average economic growth among OECD members during 2020 and 2021 will be 1.7%. For European countries, it is expected to stand at an average of 1%, while the U.S. is forecasted to have a higher growth rate of 2%. It should be noted that one of the most important factors to consider when it comes to growth is growth per capita, and Israel’s average births per woman stands at 3.1, compared to the OECD average of 1.7 and the European average of 1.6.
“Domestic demand growth will slow as the labor market cools, fiscal stimulus fades, and uncertainty from trade tensions weigh on investment,” the authors wrote. “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.”
The downgrading of Israel’s predicted growth for 2020 and 2021 is just some of the bad news in the report. The growth rate of private consumption is estimated to drop from 3.6% in 2018 to only 3% by 2021. Growth in investments is expected to bottom at 1% for 2020 before recuperating somewhat to 1.8% in 2021, but still low compared to 4%-5% in recent years. The change in exports of goods and services is forecasted to drop from 5.7% in 2018 to 4.6% in 2019 and 3% in 2020, before recovering somewhat to 3.5% in 2021. That recovery, however, is mostly credited to the expected export of gas from Israeli natural gas field Leviathan.
As can be expected, the OECD’s economists forecast that a decrease in growth will be accompanied by an increase, though a moderate one, in Israel’s unemployment rate, which reached a record low of 3.9% this year. Unemployment is expected to increase to 4.1% in 2020 and to 4.3% in 2021. The general government budget deficit is expected to jump to 4.1% in 2019, up from 1.1% in 2017, and stabilize somewhat over the next two years. The general government gross debt is expected to reach 64.5% of the gross domestic product (GDP) by 2021, up from 60.5% in 2017. Inflation should remain very low until 2021, when it is projected to reach 1.7%, still below the government target of 2%, leading the report’s authors to conclude that the Bank of Israel will start upping the interest no earlier than 2021 and even then only gradually.
The authors did conclude that Israel’s growth has remained strong and close to its potential rate and that the country’s industrial manufacturing has stayed robust. Business and consumer trust remains stable despite lengthy political uncertainty and export is growing despite the shekel’s appreciation and a global slowdown in trade, thanks to the strong performance of Israel’s tech services and tourism sectors, they said.
The OECD’s economists also provided in the report a series of recommendations on how to face Israel’s economic challenges. “The new government should focus on preserving fiscal margins while allowing for spending to enhance social cohesion and productivity,” they wrote, adding that fiscal policy should be tightened to bring the budget deficit to more sustainable levels. They recommended the government increase its tax revenues not by upping taxes across the board but by canceling inefficient exemptions and also by levying congestion charges. They also recommend upping the female retirement age to 67.
Their most important recommendations, however, are long-term. The authors recommend structural reforms to improve infrastructure, especially for public transportation; increasing competition in sheltered sectors; and enhanced training and education, especially for the Israeli Arab and ultra-Orthodox (Haredi) communities, a step they define as critical for minimizing large social disparities and increasing Israel’s very low productivity.