Israel’s economy is performing well. This is visible in GDP growth and in employment creation. Growth this year is expected to rebound to 3 percent (from 2.8 percent in 2014), the result of strong private consumption growth.
The IMF mission to Israel led by Mr. Bas Bakker today presented the Minister of Finance, Mr. Moshe Kahlon, and the Governor of the Bank of Israel, Dr. Karnit Flug, with its preliminary 2015 Article IV Consultation Concluding Statement on Israel’s economy. The IMF is expected to publish within two months its final report on the Israeli economy for 2015.
Israel’s economy is performing well. This is visible in GDP growth – Israel has not had the sharp post-crisis slowdown that many other countries have experienced. It is also visible in employment creation – since 2007, employment has grown from 59 percent of the working age population ratio to 68 percent.
Nevertheless, policy makers are confronted with a number of challenges. The fiscal deficit remains stubbornly high, leaving limited buffers to respond to shocks. Inflation is negative – well below the Bank of Israel’s (BOI) target – but housing prices continue to rise. Labor productivity is low and the gap with the United States is widening. And income inequality is among the highest in advanced countries.
The economic outlook is positive. Growth this year is expected to rebound to 3 percent (from 2.8 percent in 2014), the result of strong private consumption growth – driven by rapid employment growth, near-zero interest rates, falling import prices, and the rebound from the impact of military operations last year. Inflation will turn positive, reaching ¾ percent at the end of the year and the target band next year. There is not much slack in the economy: staff judges that the output gap is near zero. In the medium term, output will grow around 3-3 ¼ percent – in line with our current estimate of potential output growth.
Risks to the outlook are balanced. Growth could disappoint if growth in Israel’s trading partners were weaker, geopolitical tensions in the region heightened, or the shekel appreciation continued. A sharp correction in housing prices could also slow growth. Growth could also be stronger than expected, for example, if trading partner economies recover faster or investment in the natural gas sector increases. Monetary tightening in the United States would likely help Israel, as it would exert downward pressure on the shekel, which would boost growth and inflation.
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