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This document presents the macroeconomic staff forecast formulated by the Bank of Israel Research Department in January 2024[1] concerning the main macroeconomic variables—GDP, inflation, and the interest rate. This forecast was formulated in the midst of the “Swords of Iron” War, which broke out on October 7, 2023 with the cruel attack by terrorist organizations from Gaza.  This forecast is an update of the forecast that was published in November outside the normally scheduled quarterly forecasts.  Similar to the November forecast, this forecast was built under the assumption that the war’s direct impact on the economy will have reached its peak in the fourth quarter of 2023, and that it will continue until the end of 2024 with decreasing intensity. For 2025, the forecast assumes that the war will have no additional significant impact.  In addition, we assume that for the most part, the war will continue to be restricted to Gaza. The forecast naturally features a particularly high level of uncertainty, partly with regard to the duration and nature of the war in Gaza and the potential worsening of the situation on the northern front, and with regard to decisions that the government will make regarding how the budget will deal with the defense and civilian needs arising from the war.

According to the forecast, GDP is expected to grow by 2 percent in 2023 and in 2024 (similar to the November forecast) and by 5 percent in 2025.  The inflation rate in 2024 is expected to be 2.4 percent, and in 2025 it is expected to be 2 percent. The interest rate in the fourth quarter of 2024 is expected to be 3.75/4.00 percent.


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 so far on the output of various industries and on uses, as well as on an analysis of past security incidents.  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.  The results were integrated into a full forecast of the sources and uses using an analysis of the relative severity of the demand and supply restrictions in the various activity components.


[1]  The forecast was presented to the Bank of Israel Monetary Committee on December 31, 2023, prior to the decision on the interest rate made on January 1, 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.