OECD sees Israel economy rebound following Gaza ceasefire, but warns of risks

The Organisation for Economic Co-operation and Development (OECD) expects Israel’s economy to rebound in 2025 and is more optimistic about the pace of growth than local projections, but warns that the outlook is vulnerable to any renewed warfare and is dependent on responsible fiscal policy.

In a report published on Tuesday, the OECD said that it projects growth to pick up following the release of the hostages and the ceasefire agreement signed in October, which put an end to the two-year fighting with the Hamas terror group in Gaza.

The  OECD forecasts that the country’s economy will grow at a rate of 3.3 percent in 2025 and 4.9% in 2026, which is faster than the Paris-based organization’s average growth outlook for the global economy of 3.2% in 2025 and 2.9% in 2026. The Bank of Israel’s projection is for the local economy to expand at a slower pace of 2.5% in 2025 and 4.7% in 2026. The Finance Ministry’s forecast is 2.8% in 2025.

“The private sector will lead the economic expansion as military expenditure contracts,” the OECD said in the report. “Investment will be strong given the backlog accumulated during the war [and] improved household confidence amid more peaceful conditions will support private consumption.”

The wars with Hamas and the Iran-backed Hezbollah terror group in Lebanon ballooned government spending on military and civilian needs and took a toll on the country’s exports and investments. Israel’s economy grew by around 1% in 2024, down from 1.8% in 2023 and 6.3% in 2022, before the outbreak of fighting following the October 7, 2023, Hamas invasion.

The first phase of the US-brokered deal with Hamas that went into effect on October 10 is nearing completion, with two hostage bodies yet to be returned; the next phase of the plan is yet to be finalized.

The rest of the US-backed plan, which has not been formally agreed on, would see Israeli troops withdraw further from Gaza as Hamas disarms and hands control over to a transitional governing body and multinational peacekeeping force.

In recent weeks, Israel has also been escalating its strikes on Hezbollah, accusing the terror group of violating the year-old ceasefire and increasingly attempting to rebuild its capabilities.

“On the downside, returning warfare would widen the budget deficit and hurt private demand,” the OECD said. “On the upside, completing the peace agreement beyond the ceasefire could strongly boost growth, particularly in 2027, especially if new trade agreements were signed with large Middle Eastern countries.”

The organization emphasized that following the ceasefire better conditions for international business will allow exports to regain some of the market share lost during the war.

“The ceasefire has important economic ramifications, including a lower risk premium,” the OECD noted. “International trade will gain from better geopolitical conditions and Israel’s industrial specialization.”

“The ceasefire should remove a source of reluctance to doing business with Israel,” the organization added.

While Israel was mired in the longest war in the country’s history, numerous European governments canceled arms deals with major Israeli defense contractors — including Elbit Systems and Rafael Advanced Defense Systems — while trying to impose sanctions on Jerusalem over the war in Gaza. The environment made it more difficult for Israeli startups and tech firms to galvanize support from foreign investors.

“The ceasefire also allows a gradual return of reservists to civilian employment, alleviating labor shortages,” the OECD emphasized. “A better geopolitical situation, moreover, makes it easier to attract foreign workers.”

The OECD urged the government to shift expenditure focus and restrain “transfers to religious students that discourage their labor market participation, while prioritizing spending on infrastructure and education.”

To increase state revenues, the government should implement measures such as raising carbon tax rates, removing VAT exemptions, implementing a mileage tax as well as taxing unused land, sugary drinks and single-use plastic items, the OECD recommended.

“Private sector growth would strongly benefit from accelerating initiatives to unleash business dynamism, starting by cutting red tape on business creation, reducing entry barriers for professionals and importers, and streamlining building permitting procedures,” the OECD said.

The organization projects for the country’s deficit to reach 5.4% of GDP before narrowing to 4.1%  in 2026 and 2.7% in 2027, helped by an improved geopolitical situation, a reduction in defense expenditure alongside a moderation in non-defense spending.