Israel: Economic and Political Overview
In this page: Economic Outline | Political Outline
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; however, the evolving conflict following Hamas’ terrorist attacks on Israel on 7 October had a strong economic impact. Israel's economy grew by 3.1% in 2025, according to the Central Bureau of Statistics' National Accounts report. A rebound in exports and investment drove the recovery, with fixed investment up 8.1% and exports up 5.9%, while private consumption rose 2.6% year-on-year and public consumption increased 1.7% as conflict-related government spending eased. According to the OECD, growth is projected to reach 3.3% in 2026 and 5.6% in 2027, with demand composition shifting over time. Export growth picked up in 2025, rising 5.9%, 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, the deficit is projected at 5.3% of GDP in 2026 and 4.2% in 2027 as fiscal policy continues to tighten. Despite continued high military spending in 2026, 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 has lowered the policy interest rate to 4% and is expected to cut it further to 3.5% during 2027. 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 68.5% at the end of 2025, up from 68% in 2024 (official figures). Over the past two years, the ratio has increased by more than 7 percentage points, mainly due to Israel’s wars with Palestinian militant groups Hamas in Gaza and Hezbollah in Lebanon. Meanwhile, Israel’s inflation eased to 2.4% in 2025, down from 3.2% in 2024, according to the Bank of Israel. 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 at 2.3% in 2026, before easing further to 2.1% in 2027 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% in February 2026 — 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 Indicators | 2025 | 2026 (E) | 2027 (E) | 2028 (E) | 2029 (E) |
|---|---|---|---|---|---|
| GDP (billions USD) | 610.78 | 719.85 | 761.06 | 799.16 | 837.13 |
| GDP (Constant Prices, Annual % Change) | 2.9 | 3.5 | 4.4 | 3.7 | 3.5 |
| GDP per Capita (USD) | 60,335 | 69,804 | 72,459 | 74,720 | 76,886 |
| General Government Balance (in % of GDP) | -5.2 | -5.9 | -4.9 | -5.1 | -4.8 |
| General Government Gross Debt (in % of GDP) | 68.5 | 69.8 | 70.2 | 71.0 | 71.7 |
| Inflation Rate (%) | 3.0 | 2.3 | 2.1 | 2.0 | 2.0 |
| Unemployment Rate (% of the Labour Force) | 3.0 | 3.2 | 3.3 | 3.5 | 3.6 |
| Current Account (billions USD) | 8.93 | 13.98 | 17.22 | 19.65 | 21.56 |
| Current Account (in % of GDP) | 1.5 | 1.9 | 2.3 | 2.5 | 2.6 |
Source: IMF – World Economic Outlook Database, Latest data available.
Note : (E) Estimated data
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 the three months to October 2025, Israel's industrial production rose 6.1%, driven by a 5.4% increase 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 (1.3 million tourists visited the country in 2025, compared to 961,000 one year earlier – data Ministry of Tourism), 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 | 15.1 | 84.1 |
| Value Added (in % of GDP) | 1.3 | 17.2 | 72.8 |
| Value Added (Annual % Change) | -16.9 | -1.6 | 1.9 |
Source: World Bank, Latest data available.
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