Israel projection note OECD Economic Outlook November 2023

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Israel The economic impact of the evolving conflict following Hamas’ terrorist attacks on Israel on 7 October is highly uncertain and depends on the duration, scope and intensity of the conflict. The projections assume that the impact will be largely concentrated in the last quarter of 2023, leading to a temporary but pronounced slowdown. GDP growth is projected at 2.3% in 2023 and 1.5% in 2024 before recovering to 4.5% in 2025. Supply side disruptions due to the security situation and the significant decline in the civilian labour force, together with weakening economic sentiment, will mainly affect private consumption and investment. A drop in tourism will weigh on export growth. Monetary policy accommodation in the near-term will depend on uncertain exchange rate and inflation developments. Fiscal space built up after the pandemic can help provide temporary support to households and firms affected by the war and meet spending needs for defence, security and reconstruction. This should be accompanied by reprioritising permanent expenditure, while safeguarding growth-enhancing spending on infrastructure and skills provision. In the medium term, labour market and educational reforms are needed to address demographic challenges and reduce wide labour market disparities. The war is having a significant impact on the economy The economy was performing robustly before the war. GDP grew by about 3% in the first three quarters of 2023 (average annualised quarterly rate) and the labour market was close to full-employment. Following the terrorist attacks on 7 October, the shekel initially depreciated markedly but recovered to pre-war levels in nominal effective terms by mid-November. The stock market was still around 6% below its pre-war level in mid-November and risk premia are elevated. Consumer and business confidence plummeted in October. Labour shortages in the economy are severe due to the call of reservists into service, evacuation of the population close to the border with Gaza and Lebanon, absences of parents from the workplace due to the closure of the educational system, lack of Palestinian workers and exit of many foreign workers from Israel. Moreover, the number of furloughed workers, for instance due to temporary business closures, increased markedly and vacancies dropped sharply in October. Parts of the educational system and retail shops, bars and restaurants have gradually reopened in November. Credit card data suggests a partial recovery of spending in November. Consumer price inflation, at 3.7% in October, remains above the central bank’s 1-3% target range.

Israel

1. The trend is based on data from January 2016 to September 2023. Underlying data is seasonally adjusted (7-day moving average), index January 2020=1. 2. Data for 2022 is an OECD estimate. Source: Bank of Israel; OECD Economic Outlook 114 database; and OECD calculations. StatLink 2 https://stat.link/lo3mjc

OECD ECONOMIC OUTLOOK, VOLUME 2023 ISSUE 2: PRELIMINARY VERSION © OECD 2023


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Israel projection note OECD Economic Outlook November 2023 by OECD - Issuu