Experts credit high growth to strong high-tech sector, but say increased interest rates and ongoing housing crisis will likely bring the economic enthusiasm down next year

Israel’s economic forecast has been adjusted downward for 2023.

The chief economist at the Finance Ministry, Shira Greenberg, modified the forecast for the growth of the country’s gross domestic product in 2023, which was first determined in June, from 3.5% to 3%. This coincides with the forecast of the Bank of Israel, while the Organization for Economic Cooperation and Development (OECD) expects Israel’s GDP to grow only by 2.8%.

קניון שבעת הכוכבים יום הבחירות
Shopping mall in Israel (Photo: PR)

 

In 2022 Israel saw a strong GDP growth of 6.3%.

Gross domestic product refers to the value of all final goods and services produced within a country in a given year.

An official at the Finance Ministry said that the high GDP growth projected in 2022 “was backed by a tight labor market with unemployment and participation rates returning to roughly pre-pandemic levels, the strong performance of the high-tech sector and higher than expected tax revenues, leading to a surplus in the government balance for the first time in many years.”

She adds that, even though the inflation target set by the Bank of Israel was exceeded, “Israel’s inflation rate is relatively low compared to other countries.”

Eytan Sheshinski, the Sir Isaac Wolfson Professor of Public Finance Emeritus at the Hebrew University of Jerusalem, said that in 2022 “Israel did fantastically well, with a growth rate of 6.3%, unprecedented.”

Open market in Israel
Open market in Israel (Photo: Motti Kimchi)

 

He adds that between 2021 and 2022 Israel’s GDP has risen on average about 4.3% annually and it is the highest average in the OECD. “That’s a very good record,” he notes.

The reason for the steady growth is mainly the high-tech sector, Sheshinski says. Within that sector the startups that earned $26 billion this year were the real booster of such growth, he adds.

While the Israeli economy remains strong, says the official at the Finance Ministry, “we are well aware of the economic risks and challenges that lie ahead.” According to her, these include the slowing global economy, rising inflation, tightening monetary conditions and geopolitical risks.

She adds that the projections for global GDP growth in 2023 have decreased due to Russia’s war on Ukraine, which also affected the forecast for the Israeli economy.

Sheshinski adds that, despite the GDP growth forecast by the Finance Ministry and the Bank of Israel that expects around 3% growth, he believes that it will be even lower.

“I think next year is going to be very different; the Bank of Israel predicts a growth rate of about 3% in 2023, and I think it will be even lower, about 2%,” due to several conditions, he said.

בניין בנק ישראל ירושלים
Bank of Israel (Photo: AFP)

 

Sheshinski foresees a slowdown in the high-tech industry. “A lot of people are being let go or are fired from their job in the high-tech sector,” he said.

Additionally, he expects that the housing crisis in the country will continue. “In 2022 there were about 70,000 units of apartments sold, and now it’s down to 55,000 again, which was the number for the year before,” he said, noting that in the long-term Israel will need at least 70,000 new housing units per year to keep up with the population growth in the country. “But now, because of the higher interest rates, it’s going down to 55,000 units,” he added.

What is worrying, Sheshinski stresses, is that if the economy grows by 2%, while the population is growing by more than that at 2.5%, “this means that the income per capita goes down, so the standard of living in Israel will go down on average. Of course, it will not be distributed equally.”

Because of this, there will be a decrease on average in the standard of living, and this will affect consumption and, therefore, the economy, he explains.

 עבודות בנייה בנתניה
Housing construction in Netanya (Photo: Orel Cohen)

 

On the fiscal front, according to the official at the Finance Ministry, “the trend of high tax revenues collected in 2022 is very unlikely to continue into 2023, which would pose a fiscal challenge for the next government.”

Sheshinski believes that there is not much that the government can do to ease the situation.

But what the government can do, he says, is invest in infrastructure and create projects to make structural changes in the industry dealing with monopolies.

“I would focus on making some structural changes in sectors that are non-competitive and reducing the cost of living with it,” he said.

Sheshinski says that he does not see the incoming government investing in infrastructure as much as is needed.

“I don’t see that there will be plans to invest adequately, so I’m quite pessimistic about the prospects for next year,” he said.

As reported by Ynetnews