Stable economy – rapid recovery forecast

The current war with Hamas has seriously disrupted Israel’s economic base in the short term, but the war is unlikely to have long-term economic structural consequences, according to several independent analysts.

The Central Bank of Israel has received high ranking points for its efficiency. Jewish holidays Photo: Uri Farkash

Despite several wars and trade boycotts from belligerent Arab neighbours, the Israeli economy has undergone a dramatic transformation in recent decades, with high-tech inventions and start-up companies leading the way. Gas discoveries in the Mediterranean have at the same time made Israel ready for regional natural gas exports.
The current war with Hamas has seriously disrupted Israel’s economic base in the short term, but the war is unlikely to have long-term structural consequences for the economy, the US security service CIA said in May.
Israel posted a budget deficit of 11.7 billion shekels (34 billion kronor) in April, said Israel’s Finance Ministry in early May, citing higher spending as a result of Israel’s war with the Palestinian terror group Hamas in Gaza.
Over the past 12 months, the deficit rose to 7.0 percent, surpassing the 6.6 percent target for the whole of 2024.
Last year, the Global Competitiveness Report of the World Intellectual Property Organization (WIPO) ranked Israel as the most innovative economy in North Africa and West Asia. The country was also ranked 25th out of 193 nations on the UN’s Human Development Index.
The 2023 IMD World Competitiveness Yearbook ranked Israel’s economy as the world’s 23rd most competitive of the 64 economies surveyed.
The Israeli economy has been ranked as the world’s most resilient economy in the face of crises, and has ranked high in terms of investment in research and development centers.
The Central Bank of Israel has received high ranking points for its efficiency and the country ranks high in terms of skilled labor.

Rapid recovery

According to the OECD, Israel’s economy is projected to grow by 1.9 percent this year before rising by 4.6 percent in 2025. Private consumption recovered quickly and will remain a growth engine along with public consumption for the war. Investments and especially construction, which declined sharply at the end of 2023, are expected to only partially recover. Inflation is estimated to remain at 2.5 percent in 2024-2025 because the effect of the 2025 VAT increase compensates for ongoing inflation reduction.
The attacks on Israel on October 7, 2023 and the subsequent war have deeply affected the Israeli economy. Consequently, housing construction fell by 53 percent in the fourth quarter compared to the previous quarter, and total investment fell by 26 percent. The lack of foreign labor also weighs on agriculture. The recruitment of 287,000 reservists (6.6 percent of all in employment) is putting a strain on activity throughout the economy, including in the high-tech sector. However, public consumption increased by 17 percent in the fourth quarter of 2023 due to military operations.
Both exports and imports declined in the last quarter of 2023. Merchandise exports recovered in early 2024. Services exports have been slower, especially foreign tourism, which has largely stalled.

Stable currency

A stable currency has opened the way for the Central Bank to start a process of interest rate cuts. The Bank of Israel cut its main policy rate from 4.75 to 4.5 percent in January 2024. Lighter inflationary pressures are expected to allow the Central Bank to implement three more 25 basis point cuts to bring the key rate to 3.75 percent by the end of 2024 and 2025.
According to the OECD, production will increase in 2024-2025 due to the driving force of strong public and private consumption and a partial recovery of investments. Construction is only expected to partially recover from the trough by the end of 2023, holding back investment and imports. According to the OECD, foreign tourists are assumed to begin returning to Israel towards the end of 2025.
At the same time, there are risks. The opening of a war front in the north in the ongoing conflict would halt consumption and further disrupt economic activity, creating a downturn and greatly exacerbating budget pressures.
The choice to raise the general VAT rate in 2025 is welcomed by the OECD, as the current VAT rate of 17 percent is relatively low by OECD standards and as VAT is a form of taxation that involves comparatively limited economic distortions.