Predictions show growth is expected to rise to 3.4% this year, and 5.5% next, subject to the ongoing war between Israel and Hamas coming to an end in 2025.

The figures are a more positive forecast from last quarter’s report, which predicted growth to be 2.4% this year and 4.6% in 2026.

Further, economists outlined that due to Israel’s stability and sound money management prior the war, the economy has not been as affected than it otherwise would.

The report states: “The Israeli economy has been resilient to the shock of the 7 October terror attacks and subsequent war, thanks to its sound fiscal position before the war, deft monetary management, a resilient financial system and strong growth potential owing to high employment rates and a vibrant high-tech sector.”

It went on to note that spending on army operations has affected economic income, and investment is down 15% compared to pre October 2023: “The war however has prompted a jump in military expenditure that has widened the fiscal deficit, while also hurting investment and exports.”

It also noted how tightened security leading to the decline of workers from Gaza and Judea and Samaria affected investment due to labor shortages: “After dropping immediately after 7 October 2023, aggregate activity partly recovered but remained very weak in 2024.

“The composition of economic activity steeply changed in late 2023 and 2024. Investment by end-2024 stood 15% below its pre-war level, held back by labour shortages especially in construction following the suspension of work permits for Palestinians.

“Exports are still weak. Activity is set to pick up when the geopolitical environment improves.”

It went on to give credit to global popularity of Artificial Intelligence (AI), and Israel’s innovation in this area in being an inherent part of predicted growth: “AI has become a core part of new high-tech activity in Israel, accounting for almost half of all new high-tech startups and funding rounds.

“This makes AI critical to the continued performance of the high-tech sector, a key engine of export and GDP growth.”

The report went on to recommend reforms in education for members of both the Arab-Israeli and the ultra-orthodox communities, in order to encourage employment, stating: “Structural reforms can support fiscal sustainability in addition to boosting long-term growth.

“Product-market liberalisation, education and labour-market reforms hold considerable potential to boost employment, thereby supporting fiscal sustainability, alongside long-term growth.

“Many young Israelis in the ultra-orthodox and Arab sectors especially receive incomplete or lower-quality education in core subjects, limiting their later possibilities to join the labour market and their productivity – and wages – if they do.

“Enforcing the conditioning of school funding on teaching the core curriculum and ensuring equal per pupil funding for schools with similar socio-economic characteristics would improve subsequent labour-market performance.”

Additionally, the paper discouraged funding of yeshivot – educational institutes where ultra orthodox study Torah and religious texts, stating: “Removing benefits that discourage work among ultra-orthodox men would also boost employment.”

Studying Torah daily is a key component of orthodox judaism.

The report was published on the same day Foreign Minister Gideon Sa’ar met with OECD Secretary-General Mathias Cormann.

In the meeting, Sa’ar pressed the need to defeat the terror groups funded by Iran in order to maintain stability in the region and promote economic growth, and reiterated the request to open an OECD Innovation Center in Israel.

Image - Sa'ar/X