OECD forecasts moderate growth for Israel, cautions about judicial independence

The OECD said that a buoyant tech sector continued to drive Israel’s recovery from the pandemic last year, while cautioning that the country’s economic growth is predicted to moderate, citing global and domestic uncertainty.

Although the OECD Economic Surveys report for Israel published Monday did not mention the proposed contentious changes to the country’s judicial system, it did caution that “judicial independence and judicial checks and balances are vital to a strong anti-corruption and public integrity system, trust in the government and public institutions and a business environment that attracts investment and fosters economic performance.”

“In Israel, perceived levels of corruption are higher than the average for OECD countries,” the OECD said. “Government transparency and low levels of corruption are key to boosting public-sector efficiency.”

“Corruption can divert public resources from productive spending and is associated with lower spending on social services, including health and education,” the report warned.

In the survey, the OECD said that GDP is projected to grow at a robust, albeit more moderate, pace, slowing from the 6.4% rate last year to 3% in 2023 and 3.4% in 2024. In 2022, the average growth among OECD nations was 2.8%.

“The economy has rebounded strongly from the COVID-19 pandemic and has proven resilient to the repercussions of Russia’s war of aggression against Ukraine. Nevertheless, elevated inflation will slow real private consumption growth,” the OECD said. “The global slowdown is set to weaken demand from trading partners.”

“Risks are skewed to the downside, related to high global and domestic
uncertainty,” it added in the report.

The OECD noted that although Israel’s self-sufficiency in natural gas mitigates global energy price pressures, rising inflation is expected to slow real private consumption growth, and rising interest rates are set to weigh on investment growth.

The Bank of Israel has steadily raised its benchmark interest rate from a record low of 0.1% last April to 4.25% this year in a bid to rein in inflation which, hovering above 5%, has fallen short of the government’s target range of 1% to 3%. Meanwhile, a weaker shekel is making imported goods more expensive, which in turn fuels consumer prices, such as the cost of gasoline.

The OECD also cautioned that risks from the real estate sector should continue to be closely watched as property prices have been rising fast.

“The high exposure of banks to the real estate sector requires close monitoring,” the OECD said.

The OECD projected that the labor market will slightly cool as economic growth moderates. The unemployment rate stood at 3.8% in 2022 and is expected to reach 4.3% in 2023 and remain at a similar level in 2024, according to the OECD data.

At the same time, the OECD noted that the tech sector faces labor shortages as women, Arab Israelis and Haredim are underrepresented in the industry.

“Employment of Haredi men rose only moderately over 2010-20, and remains significantly below other groups and short of employment targets,” the OECD said. “Several specific benefits and exemptions for Haredi men discourage and delay their labour force participation.”

The organization recommended that the government remove subsidies for yeshiva students and condition childcare support on fathers’ employment in addition to mothers’ employment, as well as increase funding for Arab schools.

The OECD said that although the country’s budget balance has improved, “revenue growth has started to slow as the recovery moderates and some transitory factors, for example related to high real estate valuations, wane.”

“Maintaining a neutral fiscal policy stance would avoid adding to inflationary pressures,” the OECD recommended.

Furthermore, the OECD called on the government to address long-term fiscal sustainability pressures.

“Demographic challenges, related to ageing and the rising share of population groups with weak labour market attachment will put pressure on spending. So will much-needed investment to boost infrastructure and skills,” according to the report. “Maintaining long-term fiscal sustainability will require improved spending efficiency, gradually raising the retirement age, and increases in tax revenues.”

Among the risks cited in the report were also “an increase in uncertainty or security incidents [which] could weigh on business sentiment and investment,” and “headwinds from the pronounced decline in stock markets, especially for technology stocks, in Israel and the United States, where many Israeli high-tech firms are listed.”

Looking ahead, the OECD expects inflation to gradually slow toward the mid-point of the central bank target range of 1-3%, supporting a pickup in domestic demand in 2024.