The OECD has significantly downgraded its growth projections for Israel, forecasting a mere 0.6% GDP growth in 2024 – a sharp reduction from the 1.9% previously estimated in May – and 2.4% growth in 2025, down from the earlier projection of 4.6%. These figures imply negative per capita growth in 2024, with the economic outlook bleak amid inflationary pressures, fiscal imbalances and geopolitical instability. Inflation expectations have been revised upward, reaching 3.1% for 2024 and 3.6% for 2025, well above the government’s target range.
OECD economists have underscored the need for cautious macroeconomic policies, warning that inflationary expectations hovering near the upper limit of the government's 3% target may necessitate further interest rate hikes. They stress that the fiscal consolidation required to address Israel’s widening budget deficit must rely on permanent structural changes rather than temporary measures. Recommendations include eliminating VAT exemptions and reducing subsidies that discourage workforce participation, particularly among ultra-Orthodox men, while mandating core curriculum education for all students to improve productivity and expand labor force participation.
The OECD report highlights the government’s surging fiscal deficit, which reached 7.5% of GDP in 2024, up from 6.6% forecast in May. Similarly, the deficit for 2025 is now projected at 5.7%, exceeding the government’s commitment to a ceiling of 4.8% of GDP. This 1% gap – equating to approximately 20 billion shekels – raises doubts about the government’s ability to meet its fiscal targets. The OECD advises Israel to implement measures to permanently reduce the deficit while increasing revenues to fund elevated defense expenditures and critical investments in education, research, and infrastructure.
War is no friend to commerce
The ongoing Middle East conflict since October 2023 has profoundly disrupted Israel’s economic activity. Government military spending remains elevated, while private consumption has weakened. Consumer confidence remains fragile, in contrast to a partial recovery in business sentiment, as reflected in the stabilization of local stock markets and foreign exchange markets. However, persistent labor shortages, particularly in the construction sector, continue to constrain investment. The suspension of Palestinian work permits, which previously accounted for 4% of employment, has left the sector heavily reliant on a limited number of foreign workers (0.4% of employment).
Rocket fire in northern regions has further reduced industrial and agricultural production, while supply-side constraints have driven inflation upward, from 2.5% in February 2024 to the current 3.5%. The OECD highlights the disruption to Israel’s foreign trade, including higher shipping costs due to attacks on vessels in the Red Sea, diminished service trade due to reduced airline connectivity, and a slowdown in the high-tech sector. Inbound tourism remains virtually nonexistent.
The OECD supports the Bank of Israel’s restrictive monetary stance, predicting that the central bank will maintain its 4.5% interest rate through mid-2025 to counter inflationary pressures. Although fiscal tightening and a gradual improvement in supply chains starting mid-2025 are expected to mitigate inflation, price increases remain a concern. Inflation is projected to reach 3.6% in 2024, exceeding the government’s target, and will only decline to 2.9% by 2026, still at the upper limit of the target range.
Growth composition and recovery outlook
The OECD anticipates a gradual recovery, with growth rising to 2.4% in 2025 and a more robust 4.6% in 2026. However, the composition of growth is expected to shift in the coming years. Exports, particularly in the high-tech sector, and private consumption are projected to recover slowly, beginning in the second half of 2025. Meanwhile, government consumption is expected to decline, and investments will remain constrained due to labor shortages, especially in construction. The OECD calls on the government to reinstate Palestinian work permits in the construction industry to alleviate these shortages.
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The OECD underscores that risks to Israel’s economic outlook remain “very high.” On the downside, a protracted or renewed conflict could further strain the government’s fiscal position and suppress economic activity. Additionally, a loss of foreign investor confidence could lead to higher government bond yields and a depreciation of the shekel. On the upside, a de-escalation of tensions could unlock pent-up demand, both domestically and internationally, driving faster growth and improving the fiscal balance.
The OECD report paints a sobering picture of Israel’s economic trajectory, marked by fiscal challenges, inflationary pressures and geopolitical uncertainty. With growth stalling and fiscal space narrowing, the government faces mounting pressure to enact structural reforms, boost workforce participation, and implement prudent fiscal policies. As global economic conditions remain precarious, Israel’s ability to address these challenges will determine the pace and strength of its recovery in the coming years.