The economic context of Israel

Economic Indicators

The Israeli economy has recorded one of the best performances of the OECD countries in recent years, mainly due to an increase in the working-age population and the participation rate. After an abrupt halt due to the COVID-19 pandemic, the Israeli economy resumed its growth path and was performing well in the first part of 2023; however, the evolving conflict following Hamas’ terrorist attacks on Israel on 7 October had a strong economic impact. Israel's economy grew by 1% in 2024, according to the Central Bureau of Statistics' National Accounts report. A rebound in consumption helped avoid a deeper growth slump, with private consumption rising 3.9% year-on-year and public consumption increasing 13.7%, driven by government spending related to the conflict. According to the OECD, growth is projected to rise to 2.4% in 2025 and 4.6% in 2026, with demand composition shifting over time. Export growth is expected to pick up gradually, especially from the second half of 2025, including in high-tech services. Private consumption is expected to follow a similar trend. Government consumption will shift from supportive to restrictive. Investment will remain constrained by labour shortages, particularly in construction.

After a strong impulse, with the budget balance shifting from a surplus in 2022 to an estimated 7.5% of GDP deficit in 2024, fiscal policy is set to tighten by over 2% of GDP in 2025-26. Despite continued high military spending in 2025, the government plans to reduce the deficit by raising taxes and cutting civilian expenditures. Tax hikes include permanent measures like a 1% increase in the VAT rate, alongside more challenging changes such as income-tax threshold freezes. Defence spending is expected to decrease from mid-2025, though it will remain a higher share of GDP than before the war. The central bank is expected to keep the policy interest rate at 4.5% throughout the projection period. Israel spent ILS 100 billion (28 billion USD) on military conflicts in 2024, according to the finance ministry. This spending has significantly increased government borrowing and the country's debt burden. The ratio of public debt to GDP rose to 69% at the end of 2024, up from 61.3% in 2023 (official figures). Over the past two years, the ratio has increased by 9 percentage points, mainly due to Israel’s wars with Palestinian militant groups Hamas in Gaza and Hezbollah in Lebanon. Meanwhile, Israel’s inflation ended 2024 at 3.2%, up from 3% in 2023, according to the Central Bureau of Statistics. Officials attribute the inflation spike to war-related supply issues, while the central bank notes that demand also contributes to keeping prices high. Inflation is projected to rise to 3.6% in 2025, driven partly by the VAT increase (to 18%), before easing to 2.9% in 2026 as supply constraints improve (OECD data).

Israel has one of the highest living standards in the region, with salaries in line with the European average (the GDP per capita PPP was estimated at USD 54,446 in 2024 by the IMF). The poverty rate in Israel slightly decreased from 20.8% in 2022 to 20.7% in 2023. However, relative poverty remains among the highest in the OECD, despite a consistent downward trend over the past decade. The unemployment rate remained at historic lows, standing at 2.6% at the end of 2024 — the lowest since the 1970s (data CBS), which points to a tight labour market, leading to a severe shortage of workers. Since work permits for Palestinians were suspended, few new foreign workers (0.4% of employment) have entered Israel, compared to 4% of employment before the war.

Main Sectors of Industry

Israel has a diversified and technologically advanced economy. The agricultural sector employs 1% of the active population, accounting for 1.2% of GDP (World Bank, latest data available). The country has an agricultural land of 638,400 ha (FAO) and its main crops are fruits and vegetables, cereals, wine, and cattle farming. Israel is almost completely dependent on imports to meet its supply of food products: its limited land and water resources preclude agricultural self-sufficiency and affect local production costs and consumer prices; nevertheless, the increasing technological progress and innovation, a high level of investment in R&D, and the potential expansion of water resources are among the primary drivers behind the agricultural sector’s growth. Israel has become a leading agri-tech country, “greening” the desert to grow most of the exported food. Because of the war, Israel increased fruit and vegetable imports in 2024. According to the Ministry of Agriculture, 224,586 tons were imported between August 8, 2023, and August 7, 2024.

Israeli industry excels in the production of chemical products (Israel specialises in generic medicines), plastics and high-tech (aeronautics, electronics, telecommunications, software, biotechnologies, etc.). Industry as a whole comprises 18.9% of GDP and employs 15.6% of the workforce (World Bank). Numerous companies, particularly those that produce state-of-the-art technology, have benefited from their ability to secure funding from Wall Street and other international financial centres (Israel ranks second, after Canada, in terms of the number of companies registered on American stock markets). Furthermore, many leading international hi-tech companies have established R&D centres in Israel: companies such as Intel, Microsoft, Cisco, IBM and Apple chose Israel as the site for their first development centres outside of the United States. Other important sectors of activity include textiles, diamond cutting and defence. Overall, the manufacturing sector is estimated to account for 11% of GDP. In 2024, Israel's industrial production dropped 1%, driven by a 5.4% decline in high-tech output, according to the Central Bureau of Statistics.

The majority of the workforce (83.6%) is employed in the tertiary sector, which accounts for 70.8% of GDP. The finance and insurance segment features major banks, a dynamic fintech landscape, and active real estate services. The IT and telecommunications cluster excels in digital services and software exports. Tourism is another key area, although it has been severely impacted by the conflict (961,000 tourists visited the country in 2024, compared to 3 million one year earlier – data CBS), while professional services—legal, consulting, and healthcare—play critical roles.

 

Breakdown of Economic Activity By Sector	Agriculture	Industry	Services
Employment By Sector (in % of Total Employment)	0.8	15.6	83.6
Value Added (in % of GDP)	1.2	18.9	70.8
Value Added (Annual % Change)	2.7	5.5	6.3

Source: World Bank, Latest Available Data. Because of rounding, the sum of the percentages may be smaller/greater than 100%.

 

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Indicator of Economic Freedom

Definition

Definition:

The Economic freedom index measure ten components of economic freedom, grouped into four broad categories or pillars of economic freedom: Rule of Law (property rights, freedom from corruption); Limited Government (fiscal freedom, government spending); Regulatory Efficiency (business freedom, labour freedom, monetary freedom); and Open Markets (trade freedom, investment freedom, financial freedom). Each of the freedoms within these four broad categories is individually scored on a scale of 0 to 100. A country’s overall economic freedom score is a simple average of its scores on the 10 individual freedoms.}}

Score:

73,8/100

World Rank:

26

Regional Rank:

2

Economic freedom in the world (interactive map)
Source: Index of Economic Freedom, Heritage Foundation

 

Business environment ranking

Definition

Definition:

The business rankings model measures the quality or attractiveness of the business environment in the 82 countries covered by The Economist Intelligence Unit’s Country Forecast reports. It examines ten separate criteria or categories, covering the political environment, the macroeconomic environment, market opportunities, policy towards free enterprise and competition, policy towards foreign investment, foreign trade and exchange controls, taxes, financing, the labour market and infrastructure.

Score:

7.71/10

World Rank:

16/82

Source: The Economist Intelligence Unit - Business Environment Rankings 2020-2024

 

Sources of General Economic Information

Ministries

List of ministries
Ministry of Agriculture and Rural Development
Ministry of Foreign Affairs
Ministry of Economy and Industry
Ministry of Communications
Ministry of Construction and Housing
Ministry of Finance
Ministry of Tourism
Ministry of Health

Statistical Office

Central Bureau of Statistics

Central Bank

Bank of Israel

Stock Exchange

Tel-Aviv Stock Exchange

Economic Portals