Abstract
This document presents the macroeconomic staff forecast formulated by the Bank of Israel Research Department in July 2024[1] concerning the main macroeconomic variables—GDP, inflation, and the interest rate. This forecast was formulated under the assumption that the Swords of Iron War’s direct impact on the economy from both the northern and southern fronts, will continue until the beginning of 2025. This assumption reflects more prolonged fighting, and at a greater intensity, than the assumption underlying the April forecast. The forecast features a high level of uncertainty, particularly the greater probability of more serious security scenarios than those included in the forecast such as a further extension of the war’s duration and its increased intensity on various fronts.
According to the forecast, GDP is expected to grow by 1.5 percent in 2024 and by 4.2 percent in 2025—lower than our assessment in the April forecast. The inflation rate in the coming four quarters (ending in the second quarter of 2025) is expected to be 3.2 percent, partly due to the impact of taxation measures that we assume will be approved in the coming year. Inflation in 2024 is expected to be 3.0 percent (compared with 2.7 percent in the April forecast), and in 2025 it is expected to be 2.8 percent (compared with 2.3 percent in the April forecast). The interest rate in the second quarter of 2025 is expected to be 4.25 percent. In view of the increased probability that we attribute to more serious security scenarios such as an increase in the intensity and duration of the war, the risk to the growth forecast tends downward, and the risks to the inflation and interest rate forecasts tend upward.
The forecast
The Bank of Israel Research Department compiles a staff forecast of macroeconomic developments based on several models, various data sources, and assessments based on economists’ judgment. The Bank’s DSGE (Dynamic Stochastic General Equilibrium) model—a structural model developed in the Research Department and based on microeconomic foundations—plays a prime role in formulating the macroeconomic forecast.[1] The model provides a framework for analyzing the forces that have an effect on the economy, and allows information from various sources to be combined into a macroeconomic forecast of real and nominal variables, with an internally consistent “economic story”.
In order to formulate estimates of the economic impact of the war, special emphasis was placed on an analysis of real-time data that show the scope of the impact on—and the pace of recovery of—the output of various industries and uses, as well as on an analysis of past confrontations. In addition to the use of the DSGE model, we used industry-level assessments of the volume of the supply-side impact derived partly from the lack of workers during the war period and the security restrictions on activity. On the demand side, data obtained so far were analyzed in order to assess the impact on the various uses, and in order to assess the pace of their recovery so far. The results were integrated into a full forecast of the sources and uses, which contributed to the formulation of the forecast presented herein.
[1] An explanation of the macroeconomic forecasts formulated by the bank of Israel Research Department, as well as a review of the models on which they are based, appear in the Bank of Israel’s Inflation Report 31 (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.
[1] The forecast was presented to the Bank of Israel Monetary Committee on July 7, 2024, prior to the decision on the interest rate made on July 8, 2024.