Abstract

This document presents the macroeconomic staff forecast formulated by the Bank of Israel Research Department in October 2021 concerning the main macroeconomic variables—GDP, inflation, and the interest rate. The forecast assumes that the process of removing restrictions in Israel will continue in parallel with the gradual abatement of the pandemic globally in the coming two years, alongside the outbreak of further waves of morbidity in Israel and around the world that will be accompanied by relatively “soft” restrictions that will have a limited economic impact.

 According to the forecast, GDP is expected to grow by 7 percent in 2021 and by 5.5 percent in 2022, while the adjusted employment rate is expected to increase throughout the forecast period, to 59.5 percent by the end of 2022.  The inflation rate in the coming four quarters (ending in the third quarter of 2022) is expected to be 1.7 percent, and inflation in 2022 is expected to be 1.6 percent.  According to this forecast, the monetary interest rate is expected to be between 0.1 and 0.25 percent one year from now.  The forecast assumes that the State budget will be approved in final form by the end of the year.  Under this assumption, the government deficit in 2021 is expected to be 6.4 percent of GDP, while the deficit in 2022 is expected to be 4 percent of GDP.  The debt to GDP ratio is expected to be about 73.5 percent in 2021 and about 73 percent in 2022.

 

The Forecast

The forecast is based on an analysis of developments in the economy in view of the COVID-19 crisis thus far, and 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—which provides a framework for analyzing the forces that have an effect on the economy, was used to combine them into a coherent macroeconomic forecast of real and nominal variables

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