Aggregate economic activity in Israel recovered partially during the Israel-Hamas War, but it remained weak in 2024, according to the OECD Israel 2025 Economic Survey released Wednesday.
Investment by the end of 2024 was 15% lower than its prewar levels, the survey said, adding that it was held back by labor shortages, “especially in construction, following the suspension of work permits for Palestinians.” Exports were still weak, it said.
Economic activity should pick up when the geopolitical situation improves, but the labor market “will remain tight with labor shortages continuing to weigh on construction,” the report said. GDP growth would be 3.4% in 2025 and 5.5% in 2026, it said.
Continued intensification of the conflicts on Israel’s various fronts “could further degrade public accounts while directly reducing economic activity,” the report said.
Israel’s sovereign risk premium is 50 basis points higher than before the October 7 massacre, and its fiscal balance has moved from a surplus to a large deficit, it said.
“Structural reforms” in education and the labor market could boost employment and growth, the report said.“Many young Israelis, in the haredi [ultra-Orthodox] and Arab sectors especially, receive incomplete or lower-quality education in core subjects, limiting their later possibilities to join the labor market and their productivity – and wages – if they do,” it said.
“Enforcing the conditioning of school funding on teaching the core curriculum and ensuring equal per-pupil funding for schools with similar socioeconomic characteristics would improve subsequent labor-market performance,” it added. “Removing benefits that discourage work among haredi men would also boost employment.”
Public sector reforms
Fiscal measures that Israel should use to contend with the economic impacts of the war should be those that have the least detrimental effect on growth, such as taxing sugary drinks and single-use plastic, ending VAT exemptions, and increasing carbon tax rates, the report said.
It also highlighted the potential of artificial intelligence (AI) to bring about productivity benefits. Israel’s “vibrant AI-creation ecosystem has thrived on the basis of the dynamic hi-tech sector,” it said.
For this sector to flourish, the country should focus on increasing access to education in mathematics, computer science, and physics, as well as address gender gaps by encouraging more women to enter the relevant academic fields, the report said.
Just 23% of AI professionals are women, it said.
For the field to flourish, Israel should maintain a flexible approach to AI regulation, it added.
OECD Secretary-General Mathias Cormann met with Finance Minister Bezalel Smotrich on Wednesday ahead of the report’s publication. In response to the report, Smotrich said it was “a testament to the resilience of Israel’s economy and the hard work of the last few years.”
The report “presents us with significant challenges but also opportunities for growth and progress,” he said. “We will continue to collaborate with the organization to ensure the stability of the economy and promote reforms that will benefit the citizens of Israel.”