By Steven Scheer
JERUSALEM (Reuters) – Israel’s economy looks to rebound over the next two years should geopolitical tensions ease, although the country needs a host of structural reforms to support government finances and sustain growth over the long term, the OECD said on Wednesday.
Damaged by Israel’s wars with Palestinian militant group Hamas in Gaza and Hezbollah in Lebanon, triggered by Hamas’ cross-border attack on Oct. 7, 2023, Israel’s economy grew only 0.9% in 2024.
An OECD report estimated growth of 3.4% in 2025 and 5.5% in 2026 in Israel, saying an end to the military conflicts should help high-tech exports, consumer spending and investment.
OECD Secretary General Mathias Cormann presented the survey, which is published every other year, at a session of Israel’s Social-Economic Cabinet chaired by Finance Minister Bezalel Smotrich.
Inflation, stoked partly by supply shocks, is projected to be 3.7% this year, the OECD said – above its 1-3% annual target – and 2.9% in 2026.
As such, the OECD recommended the Bank of Israel continue to hold the line on interest rates until price pressures are well contained.
“There is little space for reducing rates given the inflation outlook, with the prospect of strong demand from private consumption and exports amid continuing labour shortages in 2025,” the report said.
On fiscal policy, the OECD said any fiscal consolidation would have to take into account a sharp rise in military spending. It recommended Israel implement a host of taxes such as on sugary drinks and disposables, as well as congestion fees.
Israel, it added, needs structural reforms for longer term growth including market liberalisation, and to boost employment by enforcing core curricula in its Arab and ultra-Orthodox Jewish schools so that more people enter the workforce.
“Removing benefits that discourage work among ultra-Orthodox men would also boost employment,” the OECD report said.
In addition, it said Israel should abolish government-mandated price controls on some products and enact pro-competition reforms.
One bright spot for Israel’s economy is the high-tech sector, particularly the ecosystem for artificial intelligence (AI) creation, it said, calling AI critical for the continued health of the tech sector that is a key economic growth driver.
Yet, “looking ahead, a flourishing AI sector will require a stronger basis of high-level competencies and academic research,” the OECD said. It called for AI regulation that ensures new data privacy legislation “provides AI producers and users with legal stability”.
(Reporting by Steven Scheer; editing by Mark Heinrich)
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