A new report by the Organization for Economic Cooperation and Development has found that the Israeli economy is one of the strongest economies in the world today.
OECD acting Chief Economist Alvaro Pereira, who is currently visiting Israel, presented the report Sunday to Finance Minister Moshe Kahlon, Finance Ministry Director General Shai Babad and Chief Economist Yoel Naveh.
Israel's economy continued to register "remarkable macroeconomic and fiscal performance," the report said, adding the OECD expected a major payoff to come from planned investments in offshore natural gas fields.
The report praised the Bank of Israel for maintaining a very accommodative policy, in which the benchmark interest rate has stayed at 0.1% for three years, while periodically buying foreign currency to prevent an excessive appreciation of the shekel.
But it also warned that "the risks of maintaining an accommodative monetary policy too long should not be neglected, as the favorable effects from the terms-of-trade gains could reverse quite rapidly," it said. "Low inflation does not seem related to weak demand, and tightening too late would increase the risks of overheating and rising wage pressures, which, with increased competition, would harm business profitability and investment."
Israel's annual inflation rate was at 0.1% in January but the Bank of Israel expects the rate to move back into the government's 1-3% target by the end of the year. Similarly, the OECD projects a 1% rate in 2018, rising to 1.7% in 2019.
Israel's economy grew by 3.3% in 2017, helped by strong population growth and a robust high-tech sector, and the OECD forecasts 3.5% growth this year and 3.4% in 2019, in line with the central bank's projections.
The OECD's report noted that production of the Leviathan gas field late in 2019 will add 0.3 percentage points to economic output while a sovereign wealth fund being set up from excess profits from gas sales could represent 10% of the gross domestic product by 2040, the OECD said.
The report largely praised the state's fiscal policy and a declining public debt burden but recommended more spending on education and transportation infrastructure as well as improving tax collection.
"The Israeli economy has grown faster and more consistently than nearly any other in the OECD for the past 15 years," Pereira said. "Unemployment is at historically low levels, and the rise in people with jobs has had a significant impact on the continuing convergence of living standards in Israel with those in the most advanced economies."
The report also noted several weak points it said the government should address to maintain the economy's positive growth trajectory, saying that dealing with the Israeli housing bubble should be a priority.
The OECD predicted a high chance of a "severe" correction in housing prices, which could adversely affect the economy as a whole.
Israeli housing prices have skyrocketed over the past 15 years. The government has attempted to rein in housing prices while keeping the real estate market from experiencing a steep drop, but to little success so far.
While analysts have pointed to prices leveling off in recent years, concerns that the housing bubble would burst and lead to a recession remain tangible.
"If house prices were to fall sharply, reversing some of the appreciation of the last decade, private consumption would suffer. … That would lead to adverse effects on the labor market, which would harm borrowers' ability to pay their mortgage debts and potentially entail a further house price decline," the report said.
The findings underscored the fact that Israel's solid economy provides the opportunity to implement social and structural reforms that would allow the economy to better withstand future challenges.
The report placed a special emphasis on the need to improve productivity in the labor market, which it said would naturally reduce gaps in the standard of living.
It suggested the government invest considerable resources in the interrogation of ultra-Orthodox and Israeli Arabs in the workforce, especially in industries where employees have high earning potential, such as high tech. otherwise, these sectors will remain trapped in low-income jobs, further cementing inequality in Israel.
Other findings said that improving infrastructure, investing in education and promoting consumer reforms will play a crucial part in boosting productivity and ensuring Israel's future prosperity across the board.
Touching on the relatively low Israeli scores on the OECD's student assessment PISA tests and poor financing of education and infrastructure, the report said, "Weak public spending on education and infrastructure limits the government's capacity to reduce significant socio-economic disparities and support growth. Extra spending needs to be financed. Tax collection could be improved, and there are a number of inefficient tax exemptions."
