The Israeli economy will grow 3.4% this year and 3.5% in 2016, the Organization for Economic Cooperation and development said yesterday, raising its forecast sharply from the 3% it had previously estimated for the country.
The upgrade came as the global club of most of the world’s most developed economies took a more bearish attitude on global growth. It said the world economy would expand 3.1% in 2015, down from the 3.6% it predicted last November, rising to 3.8% in 2016.
The OECD attributed its upgrade for Israel to lower world oil prices, falling interest rates and a significant revaluation of the minimum wage, all of which it said should shore up domestic demand.
A gradual improvement of the global economy boosts exports, the OECD said.
In spite of the improving economic outlook, the OECD urged the Bank of Israel to keep interest rates low – they are now at a record 0.1% – but to refrain from engaging in so-called quantitative easing, whereby a central bank buys government bonds to pump more liquidity into the economy.
“An accommodative monetary policy is still appropriate to support current growth and prevent undesirable appreciation of the shekel,” the organization said. “But the likely temporary nature of the price falls in early 2015 argues against further relaxation involving unconventional measures.”
The OECD said it expected consumer prices in Israel to fall 0.3%, with inflation to return in 2016 to about 1%, the bottom end of the government’s target range. Unemployment will average 5.5% this year and edge down to 5.4% in 2016, it said.
Israel’s budget deficit will narrow to 3.2% of gross domestic product in 2015 and drop to 2.5% next year. Meanwhile, debt-to-GDP will fall to 65.4% this year and 63.7% next year.
“The public debt reduction policy is still needed to increase the room for fiscal maneuver, but it must draw more on revenue increases, and the current rule constraining spending should be reviewed,” the OECD said.
It also urged structural reforms to enhance competition in product markets and formal education and skills, especially among the Haredi and Arab populations, to stimulate productivity.
Increased investment in infrastructure – especially public transport and the natural gas distribution network, but also education – is needed to lift some of the barriers to private investment and boost potential growth, said the OECD.