The OECD's forecast reflects a broader concern about the economic impacts of prolonged conflict in the region, indicating that geopolitical stability is crucial for economic recovery.
The disparity between the OECD's and Israeli government's growth forecasts suggests a potential disconnect between official optimism and economic realities on the ground.
The recommendation to end the suspension of work permits for Palestinians highlights the interconnectedness of the Israeli and Palestinian economies, particularly in sectors like construction.
If the conflict continues without resolution, Israel may face deeper economic challenges, including higher fiscal deficits and inflation.
A successful de-escalation of tensions could lead to a rapid recovery in economic activity, improving investor confidence and fiscal health.
The OECD has revised its growth forecast for Israel, projecting a mere 0.6% growth for 2024, significantly down from its previous estimate of 1.9%. This outlook is more pessimistic than the Israeli government's own forecasts, which predict growth rates of 3.8% and 4.4% for the same period. The organization anticipates a modest recovery in 2025, with growth expected to reach 2.4%.
The OECD also predicts a fiscal deficit of 5.7% of GDP for Israel in 2025, which is notably higher than the Israeli Ministry of Finance's estimate of 4.4%. This discrepancy highlights concerns over the impact of ongoing conflicts in Gaza and Lebanon on Israel's economic stability.
Inflation in Israel is projected to remain elevated at 3.5% to 3.6% in 2025, surpassing the Bank of Israel's target range of 1% to 3%. The OECD attributes this inflationary pressure to supply constraints exacerbated by the ongoing war.
The OECD's report emphasizes the high risks facing Israel's economy, including potential escalations in conflict that could further deteriorate public finances and reduce economic activity. A loss of confidence from foreign investors could lead to increased government bond yields and currency valuation challenges.
Despite the grim outlook, the OECD suggests that a de-escalation of the conflict could stimulate both foreign and domestic demand, potentially leading to a quicker recovery in fiscal accounts. The organization also recommends lifting the suspension of work permits for Palestinians to alleviate labor shortages in the construction sector.
