The latest OECD Economic Survey, published every two years, estimates that growth in Israel is recovering but weaker than forecasts. According to the survey, will remain high and far from the target in the coming year.
In contrast to other forecasts, the OECD expects inflation of 3.7% in Israel over the coming year. Other forecasts see inflation below the 3% high point of the Bank of Israel target range, over the next year.
In order to cope, the OECD recommends that the Israeli government take several restraining measures, in order to exit the economic storm created by the war, such as canceling VAT exemptions, increasing carbon tax rates while bringing back taxes on sugary drinks and single-use plastic items. OECD's economists support the introduction of the mileage tax to anticipate the end of falling fuel tax revenues and electric vehicles take over.
The OECD says, "The Israeli economy has been remarkably resilient to the shock of the 7 October terror attacks and subsequent war. This strength under exceptionally difficult circumstances stems from its sound fiscal position before the war, deft monetary management, a stable financial system and strong growth potential owing to high employment rates and a vibrant high-tech sector."
It adds, "Keeping the economy steady and securing solid growth requires curbing inflation and containing fiscal deficits while funding future spending needs." The OECD stressed that economic policy must maintain economic stability to return to growth including moderating inflation, reducing the deficit and supporting measures that will contribute to long-term growth.
The most expensive country in the OECD
The cost of living is emphasized in the report. Israel continues to be ranked as the most expensive country in the OECD, while Israel's per capita GDP is lower than average. The result is harm to the weaker sections: "Low-income households are particularly affected by the cost of living, since they spend almost all of their income on essential goods and services such as food, housing and transport."
The reasons for this are many and complex: According to the OECD, burdensone bureaucracy and planning obstacles harm the supply capacity of apartments and raise prices. In addition, obstacles to trade and imports lead to an increase in the price of imported products, for companies and consumers alike. However, the report notes that there has been some improvement in this aspect.
At the same time, some of the solutions that have been implemented, such as subsidies and setting a uniform price for some products, do not achieve the desired relief. The OECD recommends removing the fixed price system. The survey says "More lenient regulations in the market will facilitate the entry of new companies and strengthen competition."
Expect recovery but inflation will remain high
Israel's economic data, according to the OECD's analysis, is expected to show a recovery. Annual GDP growth will rise to 3.4%, slightly lower than the latest forecast by the Bank of Israel, which estimates that Israel will grow by 3.8% in the coming year.
Looking at the war, the OECD says risks to both the upside and downside remain high. On the one hand, "A renewed calm could ease some of the restrictions on the supply side, release pent-up demand and assist international business activity. In addition, new agreements with countries in the Middle East may contribute to increasing trade and investment."
On the other hand, clearly, the escalation could further worsen Israel's current account situation and directly harm economic activity.
On bank profits, which last year recorded a record total combined profit of about NIS 30 billion and drew much criticism, the survey stresses that the margins of banks in Israel are at the average of the OECD's countries. Due to the risk from the war, the survey writes, margins should be higher, in order to maintain the security of the banks. The Bank of Israel, the OECD recommends, should take steps to support competition, while maintaining the stability of the system.
The OECD also addressed the shortage of workers in the construction industry because of the war, which it says contributed to damage to the GDP and needs rectifying.
The survey highlights the challenge facing the haredi sector and its integration into the job market: "Many young people in the ultra-Orthodox sector receive partial or lower-quality education in core professions, which reduces their ability to integrate into the job market and their productivity and wages, if and when they do join it."
The survey also recommends that budgeting of haredi educational institutions be conditioned on the provisions of the core program and that allowances or incentives that encourage the lack of participation of haredi men in the job market be eliminated. "Removing the benefits that discourage ultra-Orthodox men from working will also contribute to increasing the employment rate," the survey states.
This is not the first time that the organization has raised the need to increase the employment rate among the haredi community and Israeli Arabs. The previous survey two years ago also pointed to the potential in encouraging employment among these populations.
Support for the tech sector is extremely significant
In the chapter that addresses the effects of AI on the Israeli economy, the OECD writes that Israel should continue to support the tech sector by, Removing bottlenecks in terms of advanced education and academic research in the fields that are critical to AI while maintaining a supportive regulatory framework. In the rest of the economy, the deployment of AI can bring large productivity benefits under proper skill policies."
Minister of Finance Bezalel Smotrich responded, "The OECD report is a testament to the resilience of the Israeli economy and the hard work that has been done in recent years. It presents us with significant challenges but also opportunities for growth and progress. We will continue to work in cooperation with the organization to ensure economic stability and promote reforms that will benefit Israeli citizens."
Published by Globes, Israel business news - en.globes.co.il - on April 2, 2025.
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