OECD Warns of Economic Strain Amid Israel's Multifront Conflicts

The Organization for Economic Co-operation and Development (OECD) has warned that Israel’s ongoing multifront conflict with Hamas, Hezbollah, and other Iranian-backed proxies will continue to weigh heavily on the country's economy. The military expenditures required to handle these conflicts, coupled with stagnant private consumption, are expected to hinder Israel's economic growth for the foreseeable future.

In its latest economic outlook, the OECD downgraded Israel's GDP growth forecast for 2024 to just 0.6%, down from the previously projected 1.9%. For 2025, the growth forecast was also revised downward to 2.4%, compared to earlier predictions of 4.6%. The 2025 forecast is notably lower than projections from Israel’s Bank of Israel and the Finance Ministry, which had estimated 3.8% and 4.4% growth, respectively. However, the OECD expects a rebound to 4.6% growth by 2026, provided the regional situation stabilizes.

The OECD cited the ongoing conflicts in the Middle East since October 2023 as key factors shaping Israel’s economic activity. While private consumption initially recovered following the sharp decline after the October 7, 2023 Hamas-led attack, it has since stagnated. Consumer confidence remained weak as of October 2024, exacerbating the challenges facing Israel’s economy.

The economic body noted that partial normalization in the business environment by mid-2025 could foster a recovery in exports and private consumption, offering some hope for future growth. However, the risks of further escalation in the region remain significant.

Rising Fiscal Deficit and Economic Challenges

The economic outlook also highlighted Israel's rising fiscal deficit, which reached 7.9% of GDP in November, surpassing the 6.6% target set for 2024. This comes amid mounting defense and civilian costs expected to exceed NIS 250 billion ($67 billion) between 2023 and 2025. Rating agencies have already downgraded Israel’s credit rating, signaling the urgent need for fiscal reforms.

The OECD urged the Israeli government to take decisive action to reduce the deficit, recommending measures such as increasing revenue to sustain higher defense expenditures. The organization also advocated for permanent fiscal reforms, such as eliminating VAT exemptions and reducing subsidies that discourage work among certain sectors of the population, including ultra-Orthodox men.

The OECD report also noted the strain on foreign trade, particularly in light of attacks on shipping routes in the Red Sea and reduced airline connections. These factors have led to increased shipping costs and complications in services trade. Additionally, heightened geopolitical tensions have stifled growth in Israel’s high-tech sector, halting the positive momentum seen earlier in the year. Foreign tourism remains nearly absent, further compounding the challenges facing Israel's economy.

Concerns Over Long-Term Economic Impact

Prominent leaders in Israel’s tech, finance, and business sectors have raised concerns that without a comprehensive budgetary recovery plan, the burden of rebuilding war-torn communities and stimulating economic growth will fall on the Israeli public for years to come. With the war's ballooning costs, households and businesses will face higher taxes and reduced services in the near future.

As Israel continues to grapple with the effects of ongoing conflicts, experts warn that urgent fiscal reforms and strategic recovery plans are necessary to mitigate the long-term impact on the economy.