Israel is Tops for OECD GDP Growth

I was recently sent a copy of the OECD’s Economic Outlook for Growth 2025, Volume 1 (dated June 3, 2025) and was surprised by a number of the findings in this analysis.

So let’s dig in…

Israel’s economy is projected to grow at a rate that surpasses the global OECD average in the coming years, provided that geopolitical tensions ease.

The report highlights Israel's economic resilience in the face of significant challenges but also points out critical areas that require reform to ensure long-term, sustainable growth.

In fact, when we drill down, we find that the OECD forecasts that Israel’s GDP growth is in the Top 5 of OECD countries in 2025 and Top spot (we’re #1) for forecasted GDP Growth in 2026.

Let’s take a look at the numbers.

Growth Projections and Comparisons

The OECD forecasts that Israel's economy will grow at a rate of 3.4% in 2025 and 5.5% in 2026. This is a rebound from an estimated growth rate of around 1% in 2024, which was significantly impacted by the conflicts. The organization's projections for Israel's growth are notably faster than its own average growth forecast for the global economy, which is 3.1% in 2025 and 3% in 2026.

It's important to note that the OECD's 2025 forecast for Israel is slightly more pessimistic than local projections from the Bank of Israel (4%) and the Finance Ministry (4.4%). However, the report acknowledges that Israel's economy has been remarkably resilient, a strength attributed to its pre-conflict fiscal position, sound monetary management, a stable financial system, and a vibrant high-tech sector.

My take: Holy Crap Batman! Israel is going to have the hottest economy over the next 18 months.

Key Economic Challenges

While the growth outlook is positive, the OECD report outlines several key challenges that Israel must address to sustain this trajectory and improve living standards.

Fiscal and Inflationary Pressures

The ongoing conflicts have led to a significant increase in government military spending, which has widened the budget deficit. The deficit reached nearly 7% of GDP in 2024, and while it is projected to decrease, it remains a concern. The OECD urges Israel to implement measures to permanently reduce the deficit and increase revenues to fund higher defense spending and crucial investments in infrastructure, education, and research.

My take: Once the “wars” on our borders subside, many of the IDF’s reservists will return to their working lives and many have had their roles eliminated due to absence or they’ll have found other employment that is more suitable to their maturity levels. This reservist return will unlock a shot of productivity to various industries as our tank drivers will become truck drivers instead of taxi drivers or our aircraft ground crew staff will now run logistics for new airlines (of which there are now 4!) or shipping companies.

Inflation is another key concern. The report notes that inflation has remained high, with a projection of 3.7% in 2025, which is above the Bank of Israel's target range of 1-3%. The OECD recommends that the central bank maintain a tight monetary policy to curb inflationary pressures.

My take: SOFR, Interest Rates rates are likely not moving downward any time soon and as a result, the Shekel will likely maintain it’s current appreciated stances against most foreign currencies.

Labor Market and Infrastructure Gaps

A significant obstacle to long-term growth is the low labor-force participation among specific population groups, particularly ultra-Orthodox (Haredi) men and Arab women. The OECD emphasizes that demographic trends mean the future growth trajectory of Israel's economy will heavily depend on increasing the employment share and productivity levels of these groups. The report recommends policy reforms, such as removing government subsidies for Yeshiva students and increasing the provision of accredited childcare in Arab municipalities, to address these issues.

My take: this reform is already happening within these cultural groups as labor participation rates have been steadily climbing over the last decade, and as more specialized programs target these groups, the stigma of various types of work will be minimized.

The report also highlights infrastructure gaps as a constraint on growth. It calls for reforms to address these deficiencies and improve educational outcomes across the population.

My take: Infrastructure is a major issue in Israel. Even though the country is an 8 hour drive from the most Northern to Southern regions, traffic at specific times of the day can be brutal and a massive drain on productivity. There is plentiful public transit via bus, but high speed rail is a challenge because it’s currently restricted to a small North/South line from Nahariya to Ashdod with East/West off shoots to Beit Sheaan, Kfar Saba and Jerusalem. There are multiple rail projects underway that will connect the most Eastern side of the country so that the seacoast corridor can be avoided and there are incentives for businesses to place their operations in in more Satellite locations like Afula, Kiryat Shemona, Be’er Sheva and Karmiel.

High Cost of Living and Competition

Israel continues to be ranked as the most expensive country in the OECD, with a per capita GDP lower than the average. To tackle this, the OECD recommends pro-competition reforms. This includes removing barriers to domestic and foreign trade by cutting red tape, easing border processes, and lowering tariffs. The report argues that these measures would strengthen productivity, increase incomes, and durably lower consumer prices.

Here’s the link to a more in-depth analysis of why Israel is the most expensive place in the OECD to live:

https://oecdecoscope.blog/2025/04/02/why-is-life-so-expensive-in-israel/

My take: This didn’t surprise me, living in Israel is more expensive than most countries, but the difference between the Israel costs and those in North America relate primarily to real estate, transportation and energy. There are structural reforms that can be made to fix the transportation and real estate challenges and the energy challenge is being met from the offshore gas deposits that are found within Israel’s territories.

The Role of the High-Tech and AI Sector

The OECD report identifies Israel's strong high-tech and artificial intelligence (AI) sector as a key engine for future growth. AI has become a core part of new high-tech activity, accounting for almost half of all new high-tech startups and funding rounds. To capitalize on this, the report recommends that public authorities maintain a flexible regulatory approach and nurture stronger links between higher education institutions and AI firms. They also advise broadening the supply of higher education in fields like mathematics, statistics, computer science, and physics to develop the necessary talent pool.

My take: AI is everywhere in Israel, but while some companies use AI models, tools and processes in their daily work, many are using AI-like tools for small segments of their product. The key is to understand who are the “real” AI companies and who are the pretenders, so as with everything, buyer beware.

Summing it Up

When I look at this OECD report I am filled with hope. I know that despite Israel’s current need to spend upwards of 7% of GDP on defense, the subsequent “Reservist Return” will create a crowding out and productivity effect that will propel growth for the next 18 to 24 months. And while there are structural reforms need to maintain this growth, it’s clear that the Israel Innovators are driving themselves and the world forward to a better place.

Here is a link to the full OECD Report:

https://www.oecd.org/en/publications/oecd-economic-outlook-volume-2025-issue-1_83363382-en.html

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