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While aggregate economic activity in Israel recovered partially in the wake of the Israel-Hamas War, 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 pre-war levels, the survey also said, noting that it was held back by labor shortages “especially in construction following the suspension of work permits for Palestinians.” The survey also noted that exports were still weak.
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 estimated GDP growth of 3.4% in 2025 and 5.5% in 2026.
Continued intensification of the conflicts on Israel’s various fronts “could further degrade public accounts while directly reducing economic activity,” the report stressed.
Public sector reforms
The report also said that “structural reforms” such as education and labor market reforms could boost employment and growth.
“Many young Israelis, in the ultraorthodox 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,” the report noted.
“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. Removing benefits that discourage work among ultra-orthodox men would also boost employment.”
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, the report said, offering taxing sugary drinks and single-use plastic, ending VAT exemptions, and increasing carbon tax rates as three such examples.
In order 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 feilds.
Just 23% of AI professionals are women, the report noted.
It also said that in order for the field to flourish, Israel should maintain a flexible approach to AI regulation.
OECD Secretary-General Mathias Cormann met with Finance Minister Bezalel Smotrich on Wednesday ahead of the report’s publication. Smotrich responded to the report, calling it “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. 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.”
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