Bank of Israel cuts GDP growth forecast amid ongoing war with Hamas – Israel News
The Israeli central bank forecast on Monday that gross domestic product (GDP) would grow less than forecast in April: 1.5 percent in 2024 and 4.2 percent in 2025, corresponding to a cumulative decline of 1.3 percent.
The prediction was part of the Bank of Israel’s research department’s July 2024 forecast. This will push Israel’s economy even further away from growth in the coming years, said Bank of Israel Governor Amir Yaron.
This downward revision partly follows the ministry’s revised assumption that the intensity and duration of fighting in the war between Israel and Hamas could increase.
In general, the forecast is based on the assumption that the direct impact of the war between Israel and Hamas on the economy will continue until early 2025, but takes into account a greater likelihood of more severe security scenarios, including a further expansion of the war and increased intensity.
The impact on GDP is felt on both the demand and supply sides, the bank said. “On the supply side, while fewer reserve soldiers are currently being mobilized than at the beginning of the war, the mobilization of reserves continues to affect labor supply in all sectors,” it said. In addition, restrictions on Palestinian workers have led to a labor supply problem in the construction sector.On the demand side, the bank forecast that government spending adjustments aimed at slowing the rise in the debt ratio would translate into a decline in public consumption in 2025. The bank also said tax increases would likely dampen private consumption.
Deficit expected to fall in September
The budget deficit will be 6.6% of GDP in 2024 and 4.0% of GDP in 2025, the bank forecast. Asked why the bank made this forecast in light of Monday’s announcement that Israel’s deficit currently stands at 7.6%, Yaron said the deficit is expected to start falling from 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 interest rates unchanged at 4.5 percent, it said on Monday. Citing the war, the bank said its monetary policy was aimed at stabilizing markets and reducing uncertainty.
In addition, Israel’s inflation is at the upper end of the target range, Yaron said, adding that it rose in the last quarter. He explained that this was one of the reasons why the committee decided to leave the interest rate unchanged. According to the forecast, the inflation rate is expected to be 3.2% in the next four quarters and 2.8% in 2025. The BOI said the recovery in economic activity was more moderate in the second quarter of 2024, following a strong rebound in the first quarter. “The government must take the necessary steps, even if they are unpopular,” said Yaron, stressing the need for a responsible budget for 2025. If the government delays necessary measures, it could contribute to an increase in the risk premium for Israel, which will harm growth and increase the debt that Israeli citizens will ultimately have to repay, Yaron said. Yields on Israeli government bonds hit a 13-year high last week, showing that demand for Israeli debt is declining, forcing the state to pay higher interest rates and raising concerns about the state of Israel’s government bond market.Aaron Katz/Globes/TNS contributed to this report.
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