Israel’s multifront conflict with Hamas, Hezbollah, and other Iranian proxies is expected to continue to take a toll on the country’s economy and finances, the Organisation for Economic Co-operation and Development (OECD) cautioned on Wednesday, citing high military expenditure and stagnant private consumption.
The OECD cut the GDP forecast for Israel to a mere 0.6 percent in 2024 from 1.9% projected back in May, and to 2.4% in 2025 versus 4.6% previously. The growth forecast for 2025 is lower than the 3.8% projection by the Bank of Israel and the Finance Ministry’s 4.4%. The OECD sees economic growth rebounding to 4.6% in 2026.
“The evolving conflicts in the Middle East since October 2023 will continue to shape economic activity,” the OECD said in its economic outlook report. “After a fast recovery from the slump in the aftermath of 7 October 2023, private consumption has grown sluggishly, with consumer confidence remaining weak in October 2024.”
“Partial normalization in the business environment is assumed to allow a pick-up in exports and private consumption from mid-2025,” the organization said.
The OECD, a club of largely wealthy nations, including Israel, cautioned that looming “risks are very large.”
“An intensification of the conflicts would further weigh on activity and an already large fiscal deficit,” the OECD warned. “Loss of foreign-investor confidence could result in further increases in government bond yields and test the value of the currency.”
The war in Gaza began on October 7, 2023, when thousands of Hamas-led terrorists invaded southern Israel, killing some 1,200 people and taking 251 hostages. Last week, a ceasefire between Israel and the Iran-backed Hezbollah in Lebanon came into effect, which sought to end almost 14 months of Hezbollah-initiated fighting across the northern border. Hezbollah began firing into Israel the day after the Hamas terror onslaught in southern Israel.
The fighting is slated to incur more than NIS 250 billion ($67 billion) in defense and civilian costs between the years 2023 and 2025, according to Bank of Israel estimates.
With the budget deficit at 7.9% of GDP in November, above a 6.6% target set for 2024, and rating agencies cutting Israel’s credit rating, the Paris-based organization called on the government to act on fiscal policy to steadily reduce the country’s deficit in coming years.
“Revenue increases are needed to fund permanently higher defense expenditures while focussing spending on key areas, including research, education, and public investment,” the OECD said. “The government should favor permanent fiscal reforms, such as removing VAT exemptions, and reducing subsidies that encourage staying outside the labor market, over measures that are more likely to be reversed, such as tax-bracket or allowance-level freezes.”
“Removing subsidies that discourage work among ultra-Orthodox men while ensuring that all pupils learn the core curriculum would broaden employment and improve labor productivity,” the organization added.
The OECD also noted that the fighting on multiple fronts and the heightened geopolitical tensions have been weighing on foreign trade.
“Ship attacks in the Red Sea have made shipping more expensive, while reduced airline connections complicate services trade,” the OECD said. “Intensifying tensions since mid-2024 have hurt the high-tech sector, halting the rally in high-tech shares … inward foreign tourism remains nearly absent.”