OECD forecasts moderate growth for Israel, cautions about judicial independence

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

While the OECD Economic Surveys report for Israel published on Monday did not mention the controversial proposed changes to the country’s judicial system, it warned that “judicial independence and judicial checks and balances are critical to a strong anti-corruption system and the integrity of the community, trust it. government and public institutions and a business environment that attracts investment and sustains 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 the efficiency of the public sector.”

“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 strong, albeit more moderate, pace, slowing from the rate of 6.4% last year to 3% in 2023 and 3.4% in 2024. In 2022, the average growth was among the OECD nations 2.8%.

“The economy has emerged strongly from the COVID-19 pandemic and has proven resilient to the consequences of Russia’s war of aggression against Ukraine. However, rising inflation will slow real growth in private consumption,” the OECD said. “The global slowdown has reduced demand from trading partners.”

“Risks are skewed to the downside, related to global and domestic highs
uncertainty,” he said in the report.

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

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

The OECD also warned that risks from the real estate sector should continue to be closely watched, as property prices were rising rapidly.

“Banks’ high exposure to the real estate sector requires close monitoring,” the OECD said.

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

At the same time, the OECD noted that there is a labor shortage in the technology sector because women, Israeli Arabs and Haredim are underrepresented in the industry.

“Employment of Haredi men increased only modestly during 2010-20, and remains well below other groups and short of employment targets,” the OECD said. “Several specific benefits and exemptions for Haredi men discourage and slow down their participation in the workforce.”

The organization recommended that the government end subsidies for yeshiva students and child care support conditional on the employment of fathers as well as the employment of mothers, as well as increasing funding for Arab schools.

The OECD said that while the country’s budget balance has improved, “income growth is slowing as the recovery slows and a number of temporary factors, such as high property valuations, have eased. “

“Maintaining a neutral stance on fiscal policy could add to inflationary pressures,” suggested the OECD.

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

“Demographic challenges, related to aging and the increasing share of population groups with weak attachment to the labor market will put pressure on spending. So there will be 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 increasing tax revenues.”

Among the risks cited in the report were “increased uncertainty or security incidents [which] could weigh on business sentiment and investment,” and “front waves from the significant 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 towards the midpoint of the central bank’s target range of 1-3%, supporting an increase in domestic demand in 2024.

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