Israeli Growth to Slow in 2014 on Fiscal Tightening, OECD Says

Israeli economic growth will probably slow next year as fiscal tightening offsets the positive effects of a pick-up in export markets, the Organization for Economic Cooperation and Development said.

Growth will probably to slow to 3.4 percent in 2014 from 3.9 percent this year, the organization said. Excluding natural gas production, output will slow to 2.7 percent from 2.9 percent, the OECD said.

“External demand will underpin activity in 2014, but the contractionary effects of a sharp fiscal consolidation will be substantial,” the Paris-based OECD said in its World Economic Outlook report today.

The OECD forecast an upswing in 2014 in the economies of the U.S. and European Union, Israel’s top two export markets, and sees world trade growing 5.8 percent from 3.6 percent this year.

Exports may also benefit from the cumulative cut of 50 basis points in Israel’s benchmark lending rate this month, designed to narrow the gap with rates in major economies and prevent a strong shekel from compromising export-led growth. Exports make up about 40 percent of Israel’s economy, and a stronger shekel makes them more expensive to buy.

Narrowing Deficit

While the central bank is cutting borrowing costs, the government is paring planned spending and raising taxes to rein in the budget deficit.

“Remaining within the spending ceiling must be a priority alongside the implementation of revenue measures to keep the deficit on track.” the report said.

Looking ahead, the central bank may need to change direction in its monetary policy as early as next year, the OECD said.

“A tightening monetary stance, probably beginning in the second half of 2014, may be required to prevent inflationary pressures from taking hold,” it said.

The unemployment rate may rise to 7.2 percent in 2013 from 6.9 percent last year, according to the report. The rate may then drop to 6.8 percent in 2014, the OECD said.

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