Abstract
This document presents the macroeconomic staff forecast formulated by
the Bank of Israel Research Department in April 2021 concerning the main
macroeconomic variables—GDP, inflation, and the interest rate. The forecasts
published throughout the COVID-19 crisis contained two scenarios, in view of
the high level of uncertainty throughout the crisis. In view of the progress of
the vaccination campaign and the decline in morbidity in recent months, this
forecast contains a single main scenario based on the assumption that there
will be no significant worsening of morbidity within the forecast range that
would make it necessary for the government to reimpose restrictions on economic
activity with significant macroeconomic implications.
According to the forecast, GDP is expected to grow by 6.3 percent in
2021 and by 5.0 percent in 2022, while the broad unemployment rate is expected
to decline to 6 percent by the end of 2022.
The GDP level during these years is expected to be higher than in the
“rapid inoculation” scenario from the forecast published in January, and in
2022 it is expected to be just 1.4 percent lower than
the level expected according to the precrisis trend. The inflation rate in the coming four
quarters (ending in the first quarter of 2022) is expected to be 1.1 percent,
and inflation in 2022 is expected to be 1.2 percent—both higher than the rates
in the rapid inoculation scenario from the January forecast. According to this forecast, the monetary
interest rate is expected to be 0.1 percent one year from now.
There is significant uncertainty regarding the policy path that the
incoming government will adopt. As part
of the forecast, we assume that the “COVID boxes” that were approved will not
be fully utilized thanks to the economic recovery, and that the government will
not approve additional boxes. In
addition, we assume that within the basic budget, which does not include the “COVID
boxes”, the government will adjust its expenditures to the expenditure ceiling
set out by law,
and that from 2022 onward, it will also act to gradually reduce the structural
deficit. Under these assumptions, the
government deficit is expected to be 8.2 percent of GDP in 2021, and 3.6
percent of GDP in 2022. The debt to GDP
ratio is expected to be about 77 percent in each of these two years.
The Forecast
In this forecast, as in the recent forecasts published, special emphasis
is placed on an analysis of the volume of activity in the economy as a result
of government restrictions to fight the spread of the virus. In addition, the forecast
contains information from various other 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.
a.
The global environment
Our assessments of expected developments in the global economy are based
mainly on projections by international institutions (the International Monetary
Fund and the OECD) and by foreign investment houses. Accordingly, we assume that
GDP growth in the advanced economies will be 5.1 percent in 2021 and 3.6
percent in 2022—higher than the assessment upon which the previous forecast was
based. The forecasts of world trade were
also revised upward, with growth of 8.4 percent expected in 2021 and growth of
6.5 percent expected in 2022. The forecast of inflation in the advanced
economies was revised upward to 2.0 percent in 2021 and 1.7 percent in
2022. The average interest rate of the
central banks is expected to increase to about 0.2 percent by the end of 2022, similar
to the assessments upon which the January forecast was based. Since the publication of the January forecast,
the price of Brent crude oil increased from about $51 to about $66 per barrel.
b.
Real activity in Israel
In view of the progress in the vaccination campaign and the decline in
morbidity, the forecast focuses on a single baseline scenario that is similar
in essence to the rapid inoculation scenario from the January forecast. In particular, we assume that there will be
no significant worsening of morbidity within the forecast range that would make
it necessary for the government to reimpose restrictions on economic activity with
significant macroeconomic implications.
Under this assumption, our assessment is that GDP will increase by
6.3 percent in 2021 and by 5.0 percent in 2022 (Table 1).
Growth in 2020 was higher than our assessment in the January forecast, showing
that from the second lockdown onward, epidemiological restrictions on economic
activity had less of an impact on GDP than we previously estimated. Therefore, the forecast GDP levels for 2021
and 2022 were revised upward relative to the rapid inoculation scenario in the
January forecast, and the forecast deviation of GDP from the precrisis trend
was accordingly lowered. The closure of
the gap with the trend is reflected in a slightly more moderate projected
growth rate in 2022 compared with the rapid inoculation scenario from the
January forecast, as the contraction in GDP in 2020 turned out to be more
moderate. The growth forecast for 2021 remained unchanged. The convergence of the GDP level to the
precrisis trend is expected to be accompanied by a gradual decline in the broad
unemployment rate, but to a higher level than what prevailed prior to the
crisis (an average of 7.5 percent in the final quarter of 2021 and an average
of 6.0 percent in the final quarter of 2022).
In 2020, private consumption contracted sharply, due to the lockdowns
and restrictions on activity that mainly affected the domestic trade and
services industries, and despite the increase in households’ disposable income
during the year.
Accordingly, the removal of the restrictions in 2021 is expected to be
reflected first and foremost in a recovery of private consumption, which is the
most dominant factor in reducing the deviation of GDP from the trend this
year. However, in 2022, the level of
private consumption is expected to remain lower than the precrisis trend in
view of the higher unemployment rate and a reduction in government transfers,
which are expected to reduce households’ disposable income compared to the
precrisis trend.
Investment growth is also expected to recover during the forecast
period, but the level of investments is expected to remain below the precrisis
trend in view of the vast uncertainty the business sector will face in the coming
period. Exports were only moderately
affected in 2020, and are therefore expected to increase at a rate similar to
their precrisis growth rate.
Table 1
Research Department Staff Forecast for 2021–2022
(rates of
change, percenta, unless stated otherwise)
|
|
2020
|
Forecast for 2021
|
Change from the rapid inoculation scenario in
the previous forecast
|
F | orecast for 2022
|
Change from the rapid inoculation scenario in
the previous forecast
|
GDP
|
-2.6
|
6.3
|
0.0
|
5.0
|
-0.8
|
Private consumption
|
-9.5
|
11.0
|
-1.5
|
7.0
|
-1.0
|
Fixed capital formation (excl. ships and aircraft)
|
-3.5
|
5.5
|
2.0
|
4.5
|
-4.0
|
Public consumption (excl. defense imports)
|
2.9
|
4.0
|
-2.5
|
2.5
|
3.5
|
Exports (excl. diamonds and startups)
|
1.3
|
4.0
|
1.0
|
4.0
|
-0.5
|
Civilian imports (excl. diamonds, ships, and aircraft)
|
-8.0
|
11.0
|
0.0
|
6.0
|
-1.5
|
GDP deviation from the precrisis trend (percent)
|
-5.9
|
-3.1
|
1.2
|
-1.4
|
0.5
|
Broad unemployment rateb - average for the year
|
15.7
|
9.9
|
0.3
|
6.6
|
0.4
|
Broad unemployment rateb – fourth quarter
|
16.1
|
7.5
|
-0.2
|
6.0
|
0.6
|
Government deficit (percent of GDP)
|
11.6
|
8.2
|
0.2
|
3.6
|
0.0
|
I | nflationc
|
-0.7
|
1.3
|
0.7
|
1.2
|
0.3
|
a In the
forecast of National Accounts components, the rate of change is rounded to
the nearest half percentage point.
b Unemployment
rate among those aged 15 and over. In accordance with the Central Bureau of
Statistics broad definition, the unemployment rate includes the unemployed
under the normal definition (someone who has not worked, wanted to work, was
available for work, and looked for work), as well as employees temporarily
absent for an entire week for reasons having to do with COVID-19 (including
those on furlough), and those not participating in the labor force for
reasons having to do with COVID-19.
c The
average of the Consumer Price Index in the last quarter of the year compared
with the average in the last quarter of the previous year.
|
c.
Inflation and interest
rates
According to our assessment, inflation in the next four quarters
(ending in the first quarter of 2022) is expected to be 1.1 percent (Table
2). In 2021 and 2022, it is expected to be 1.3 and 1.2 percent, respectively
(Table 1). The forecast was revised upward relative to the rapid
inoculation scenario from the January forecast in view of the Consumer Price
Index readings that were obtained since then, which were higher than we had forecast,
and in view of the increases in global commodity prices and inflation
forecasts, which are expected to contribute to an increase in the inflation of
tradable goods prices during the forecast period.
Our assessment is that in the short term, there will be a number of
forces working to increase inflation in the prices of nontradable goods and
services as well. First, in view of the
relaxation of restrictions on activity, we expect an increase in demand for
services that were restricted in the past year (such as restaurants, leisure,
and internal tourism). Second,
household’s accumulated savings during the past year are expected to contribute
to this demand. The effect of these
forces is expected to be significant in the short term, but to subside later in
the forecast period. In particular, our
assessment is that inflation in the prices of nontradable goods and services
will increase gradually until the end of 2022, but to a level that is slightly
lower than what was prevalent prior to the crisis. This is because the unemployment level is
expected to remain higher, and government support is expected to decline, such
that total household disposable income is expected to be lower than the precrisis
trend.
Our assessment is that the interest rate will be 0.1 percent in a
year (Table 2). The low level of the
interest rate, which is part of the set of tools used by the Bank of Israel to
deal with the crisis and the exit from it, supports the recovery of demand and
the entrenchment of inflation within the target range. If further accommodation is necessary beyond
the accommodation of the monetary interest rate, the Bank of Israel will be
able to use existing or additional policy tools.
Table 2 shows that the Research Department’s staff forecast regarding
inflation and the interest rate in one year is similar to the average of the
private forecasters’ projections, and slightly lower than expectations derived
from the capital market. We emphasize
that in view of the close proximity of the forecast’s publication date to the
publication of the March CPI, the forecasters’ projections and expectations
derived from the capital market in Table 2 are those that were obtained prior
to the publication of the CPI.
Table 2
|
Inflation and interest rate forecasts for the coming year
|
(percent)
|
|
Bank of Israel Research Department
|
Ca
pital marketsa
|
Private f
orecastersb
|
Inf
lation ratec
|
1.1
|
1.5
|
1.0
|
(range of forecasts)
|
|
|
(0.2–1.4)
|
Interest rated
|
0.10
|
0.13
|
0.09
|
(range of forecasts)
|
|
|
(-0.1–0.1)
|
a) Average expectations in the week prior to
the publication of the March CPI. Inflation expectations are seasonally
adjusted.
b) The average of forecasts published prior
to the publication of the March CPI.
c) Inflation rate in the coming year. Research
Department: in the four quarters ending in the first quarter of 2022.
|
d) The interest rate one year from now. (Research
Department: in the first quarter of 2022.) Expectations derived from the
capital market are based on the Telbor market.
SOURCE: Bank of Israel.
|
d.
Main risks to the forecast
As stated, in view of the data accumulated since the publication of the
previous forecast, this forecast focuses on a main scenario that is similar in
nature to the rapid inoculation scenario from the January forecast. However, our assessment is that the risks to
the success of the vaccination campaign have not completely disappeared. For instance, the risk of the development of
a rotation that is resistant to the vaccination or that will be reflected in more
serious morbidity among the unvaccinated population remains. It also may turn out that the vaccine will be
effective for a shorter amount of time than currently expected. Our assessment
is that if these risks are realized, the government will take steps to limit activity,
similar to the slow inoculation scenario from the January forecast. However, in view of the data from the second
and third lockdown periods, our assessment is that such restrictions will have
a limited effect on macroeconomic activity.
In addition to the morbidity risks, there is significant uncertainty
regarding the timing of the passage of the budgets for 2021 and 2022, as well
as the nature of those budgets, and regarding measures the incoming government
will take in all areas of its activity.