Israel’s economy is set to grow at an annual pace of more than 3% through 2019 thanks to natural gas development and higher wages, but the continued increase in housing prices poses a risk to the country’s banks, the Organization for Economic Cooperation and Development said in a report released Tuesday.
The OECD trimmed its economic-growth outlook for Israel to 3.1% for this year from a previous 3.2%, but it said the pace would pick up to 3.5% next year, up from a previous 3.3% forecast, and would expand at a 3.3% rate in 2019.
“Domestic demand will be supported by accommodative fiscal and monetary conditions, the development of new gas fields and higher wage increases due to the persistence of low unemployment. With the somewhat stronger external environment, exports are also picking up as the shekel has stabilized at least temporarily,” the OECD said.
With unemployment expected to stay around a low level of 4.2% over the next two years and with wages rising, households are increasing their savings rate sharply, from just 1.5% of disposable income this year to 3.4% in 2019, the report predicted.
Finance Minister Moshe Kahlon has given top priority to reining in housing prices and the increase has slowed, but the OECD said the pace remains high, at 4% year on year in recent months.
“The risks of unfavorable developments in the real estate market remain high, and the banks are heavily involved in this sector,” it said, signaling concerns about the impact of a sudden fall in housing prices, should they occur.
The report referred to “tensions” in the real estate market aggravating price rises, which it said would be eased by a gradual rise from low interest rates. The Bank of Israel’s base rate has been at a record low 0.1% since March 2015.
The government will probably end 2017 with a budget deficit of just 1.75% of gross domestic product, but the figure will rise to between 2.5% and 2.75%.
The report hinted that policy makers would do better to devote a surge in tax revenues to improving services and help build “social cohesion” rather than cutting taxes, as Kahlon and Prime Minister Benjamin Netanyahu are both advocating.
“Higher spending on education and training, health and pensions will promote more inclusive growth,” it said.
The OECD Economic Outlook said global economic growth would reach 3.6% this year, up from its previous forecast of 3.5%. It will accelerate to 3.7% in 2018 and 3.6% in 2019. U.S. growth will be 2.2% this year and 2.5% in 2018 while the eurozone will grow by 2.4% and 2.1%, in 2018 and 2019.
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