To the full document


This document presents the forecast of macroeconomic developments compiled by the Bank of Israel Research Department in July 2020[1] regarding the main macroeconomic variables—GDP, inflation and the interest rate. According to the staff forecast, gross domestic product (GDP) is projected to contract by 6 percent in 2020, compared with an expected contraction of 4.5 percent in the previous forecast that was published at the end of May. In 2021, GDP is projected to increase by 7.5 percent, slightly higher than the projection in the May forecast. The inflation rate in 2020 is expected to be -1.1 percent, lower than the previous forecast, and 0.7 percent in 2021, similar to the May forecast. According to the forecast, the Bank of Israel interest rate in one year is expected to be in the 0–0.1 percent range.



In this forecast, as in the previous forecasts published in April and May, special emphasis was placed on an industry-by-industry analysis in order to understand the economic impact of the corona crisis and of policy measures taken due to the crisis. In particular, the forecast is based on an assessment regarding the shutdown of various industries as a result of government measures to fight the spread of the coronavirus. The staff forecast also includes information from additional models, combining them into a macroeconomic forecast of real and nominal variables through a structural model based on microeconomic foundations—the Bank’s DSGE (Dynamic Stochastic General Equilibrium) model developed in the Research Department.[2]


a.     The global environment

Our assessments of expected developments in the global economy are based mainly on projections by international institutions and foreign investment houses. The assumptions regarding GDP, inflation, world trade, and the interest rate in advanced economies reflect a worsening relative to those used in the previous forecast. Specifically, we lowered our forecast for import growth in advanced economies to -13 percent in 2020, and raised it to 8 percent in 2021. We assume that GDP in advanced economies will contract by 8 percent in 2020 and grow by 4.8 percent in 2021.  We also assume that inflation in advanced economies will be 0.3 percent in 2020 and 1.5 percent in 2021, and that the monetary interest rate will remain at an average rate of 0.1 percent until the end of 2021. Oil prices recovered somewhat since the publication of the May forecast.  The average price of a barrel of Brent crude oil was $33 in the second quarter of 2020, about 35 percent lower than the average price in the first quarter.  However, the price increased to about $41 by the end of the quarter.


Uncertainty regarding these developments is high, particularly regarding restrictions on economic activity as a result of a second wave of morbidity.  At the same time, our assumption in the forecast is that there will not be a worsening of the restrictions on economic activity due to a second wave of morbidity in Israel and abroad.



b.     Real activity in Israel

GDP is expected to contract in 2020 by 6 percent, 1.5 percentage points greater than in the previous forecast, and is expected to grow by 7.5 percent in 2021 (Table 1). The downward revision of economic activity in 2020 is explained by an increase in morbidity rates, which increases the uncertainty and delays a return to routine economic activity.  It is also explained by the pace of decline in the shut-down rates in the various industries, which is lower than our assessment in the May forecast, and by global developments.  The expected decline in GDP in 2020 is reflected in all uses other than public consumption (Table 1).

 Private consumption is expected to decline by 6.5 percent in 2020, despite its recovery beginning in the third quarter.  This is due to an expected negative impact to employment and income, increased uncertainty, and “purple badge” restrictions that will moderate demand.  The annual decline in private consumption is unusual from an historical perspective, and such a decline has not been recorded since 1984.  In 2021, private consumption is excepted to recover and to grow by 8 percent, but its level will still be lower than the level derived from the pre-crisis trend.

 Investments are expected to decline by 13.5 percent in 2020 in view of the increased uncertainty and expected decline in activity, and to increase by 5.5 percent in 2021.  Exports are expected to decline by 13 percent in 2020, despite relatively good data according to the second estimate of National Accounts for the first quarter, in view of the expected large decline in global trade.  In accordance with the expected recovery in world trade in 2021, our assessment is that exports will grow by 7.5 percent in 2021.

 In contrast, public consumption is expected to increase in 2020, mainly due to the contribution of the fiscal package approved by the government to support economic activity and employment. The difference relative to the May forecast is explained by a revised assessment regarding actual government expenditure.  The government deficit is expected to be about 12 percent of GDP in 2020, and the debt to GDP ratio is expected to increase to 75 percent (compared with 11 percent and 74 percent, respectively, in the May forecast).  In 2021, the deficit is expected to be 6.9 percent of GDP, and the debt-to-GDP ratio is expected to be 77 percent.

 On the sources side, imports are expected to contract as well in 2020, by 14 percent, and to grow by 6.5 percent in 2021, in view of the development of private consumption and investment in those years.

 According to our updated assessment, and based on an analysis of the industries that are highly likely to remain vulnerable even after restrictions are removed (tourism and hospitality, export manufacturing, startup companies), we expect that unemployment (among the primary working age population) in the fourth quarter of 2020 will be 9 percent (compared to 8.5 percent in the previous forecast), and that it will decline during 2021, so that in the fourth quarter of that year, to 6 percent in the fourth quarter (compared with 5.5 percent).  In other words, even at the end of 2021, the economy is not expected to return to full employment.


[1] The forecast was presented to the Monetary Committee on July 5, 2020 during its meeting prior to the decision on the Bank of Israel interest rate reached on July 6, 2020. 

[2] An explanation of the macroeconomic staff forecasts compiled by the Research Department, as well as a review of the models on which they are based, appear in Inflation Report number 31 (for the second quarter of 2010), Section 3c.  A Discussion Paper on the DSGE model is available on the Bank of Israel website, under the title: “MOISE: A DSGE Model for the Israeli Economy,” Discussion Paper No. 2012.06.