The multifrontal conflict between Israel and the terrorist groups Hamas and Hezbollah, as well as other proxies of Iran, is expected to continue to weigh on the country’s economy and finances, the Organization for Cooperation and Development warned on Wednesday. Economic Development (OECD), citing high military spending and stagnant private consumption.
The OECD lowered its growth forecast for Israel to just 0.6% in 2024, from 1.9% forecast in May, and to 2.4% in 2025, from a previous estimate of 4 .6%. These forecasts for 2025 remain lower than those of the Bank of Israel (3.8%) and the Ministry of Finance (4.4%). However, the OECD anticipates a rebound to 4.6% in 2026.
“The evolution of conflicts in the Middle East since October 2023 will continue to weigh on economic activity,” indicates the OECD in its report on the economic outlook. “After a rapid recovery following the collapse caused by October 7, 2023, private consumption is growing slowly, with consumer confidence remaining weak in October 2024.”
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“The partial normalization of the business environment should allow a resumption of exports and private consumption from mid-2025,” the Organization said.
However, the OECD, a club of mostly wealthy countries that includes Israel, has also warned of “very
important” that are looming on the horizon.
“An intensification of conflicts would further weigh on activity and on an already significant budget deficit,” warned the OECD. “Losing foreign investor confidence could lead to a further rise in government bond yields and test the value of the currency. »
The largely empty Mahane Yehuda market in Jerusalem on August 4, 2024. (Chaïm Goldberg/Flash90)
The war in Gaza was sparked on October 7, 2023, when thousands of Hamas terrorists invaded southern Israel, carrying out a pogrom in which they murdered more than 1,200 people and took 251 hostages. The day after this attack, Hezbollah, supported by Iran, opened another front by launching fire against Israel from Lebanon, thus triggering nearly 14 months of fighting on the northern border. Last week, a ceasefire was established between Israel and Hezbollah to end these clashes.
According to Bank of Israel estimates, the fighting is expected to cost more than 250 billion shekels in civilian and defense spending between 2023 and 2025.
With the budget deficit reaching 7.9% of GDP in November, above the 6.6% target set for 2024, and the downgrading of Israel’s credit rating by some rating agencies, the OECD, based in Paris, urged the government to adopt a strict budgetary policy to gradually reduce this deficit in the years to come.
“Revenue increases are needed to sustainably finance higher defense spending, while focusing fiscal efforts on key sectors such as research, education and public investment,” the OECD said. “The government should prioritize structural tax reforms, such as removing VAT exemptions, and reducing subsidies that discourage labor market participation, rather than temporary measures such as freezing tax brackets or benefits. »
“Removing subsidies that discourage ultra-Orthodox men from working, while ensuring that all students follow a common core, would help expand employment and improve labor productivity,” the organization added.
The OECD also highlighted the impact of fighting on several fronts and increased geopolitical tensions on foreign trade.
“Ship attacks in the Red Sea have increased shipping costs, while reduced air links complicate trade in services,” she noted. “Intensifying tensions since mid-2024 have also affected the high-tech sector, preventing the recovery of stocks in this area. Foreign tourism also remains almost non-existent. »
