This document presents the macroeconomic staff forecast compiled by the Bank of Israel Research Department in July 2021 concerning the main macroeconomic variables—GDP, inflation, and the interest rate. In this forecast, we assume that lockdowns or marked limitations on activity in respect of COVID-19 will not be required. The forecast reflects our assessment that the economy continues with a process of recovery from the crisis, after the cancelation of a large majority of the limitations, and that by the end of 2022, activity will approach the trend line from precrisis period. According to the forecast, GDP is expected to grow by 5.5 percent in 2021 and by 6.0 percent in 2022, while the broad unemployment rate is expected to decline over the forecast period, to 5.5 percent at the end of 2022. The inflation rate in the coming four quarters (ending in the second quarter of 2022) is expected to be 1.0 percent, and the inflation rate in 2022 is expected to be 1.2 percent, similar to our assessment in the previous forecast. According to this forecast, the monetary interest rate is expected to be 0.1 percent one year from now. We assume that the State budget will be passed by the end of the year and that the fiscal consolidation will be pushed off to 2023. Under these assumptions, the government deficit in 2021 is expected to be 7.1 percent of GDP and in 2022 is expected to be 3.8 percent of GDP. The debt to GDP ratio is expected to be 74 percent in each of those years.
The Forecast
This forecast is based on an analysis of the economy’s recovery from the COVID-19 crisis and it contains information from various indicators and models. The Bank’s DSGE (Dynamic Stochastic General Equilibrium) model developed in the Research Department—a structural model based on microeconomic foundations—was used to combine them into a coherent macroeconomic forecast of real and nominal variables.[1]
[1] An explanation of the macroeconomic forecasts formulated by the Research Department, as well as a survey of the models upon which it is 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.