Abstract
This document presents the macroeconomic staff forecast formulated by the Bank of Israel Research Department in October 2024[1] concerning the main macroeconomic variables—GDP, inflation, and the interest rate. This forecast was formulated under the assumption that the war’s direct impact on the economy will continue into early 2025. This assumption reflects more intense fighting toward the end of 2024 and in early 2025 than the assumption underlying the July forecast. In particular, the high intensity that has been a feature of the recent period is expected to continue in the near future, with a broader interruption of economic activity on the home front, mainly in the north of the country. The forecast features a particularly high level of uncertainty. In particular, there is an increased probability of more severe security scenarios than those included in the baseline scenario of the forecast such as a further intensification of the fighting on various fronts and a longer extension of the war’s duration. If these come to pass, they are expected to be reflected in a further impairment of economic activity.
According to the baseline forecast, GDP is expected to grow by 0.5 percent in 2024 and by 3.8 percent in 2025, which are 1.0 percent and 0.4 percent lower than our assessment in the July forecast, respectively. The inflation rate in the coming four quarters (ending in the third quarter of 2025) is expected to be 3.2 percent, in view of the more inflationary domestic environment than in our July assessment, partly due to the revised assumptions regarding the intensity of the fighting. Inflation in 2024 is expected to be 3.8 percent (compared with 3.0 percent in the July forecast), and in 2025 it is expected to be 2.8 percent (similar to the July forecast). The expected interest rate path was revised upward, such that in the third quarter of 2025, the interest rate is expected to be 4.5 percent. In view of the high geopolitical uncertainty and the increased probability that we attribute to more severe security scenarios, the risk to the growth forecast tends downward, and the risks to the inflation, interest rate, and government deficit 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.[2] 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.
[1] The forecast was presented to the Bank of Israel Monetary Committee on October 8, 2024, prior to the decision on the interest rate made on October 9, 2024.
[2] 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.