After two years of multi-front war, the OECD is presenting an unusually optimistic outlook for Israel’s economy. In its latest forecast, the organization predicts growth will reach 3.3% in 2025, then jump to 4.9% in 2026, and remain above Israel’s long-term trend in 2027.
The OECD says Israel is shifting away from growth fueled by surging public spending and widening deficits and toward private-sector expansion supported by falling inflation and gradually declining interest rates, which are projected to reach 3.75% next year. This would mark a reversal after years in which emergency spending on defense, displaced families and wartime needs drove much of the economic activity.
A major bright spot is exports. According to the forecast, Israel’s service exports to the United States—dominated by high-tech, software and R&D—are not expected to be affected by former President Donald Trump’s tariff regime and will continue to grow. The OECD projects increases of 5 percent in 2025 and 7.7 percent in 2026.
Goods exports are also expected to be only modestly affected. The OECD estimates an “effective” average tariff of 10.2 percent, significantly lower than the headline rate of 15 percent, due to the composition of Israeli exports. The report also highlights strong global demand for Israel’s defense and cyber industries, noting the sector’s expansion will further boost the economy.
Still, the organization warns the outlook is highly dependent on sustained quiet. A return to war could stall the recovery, while irresponsible fiscal policy could undermine progress. For 2026 and 2027, the OECD identifies three pillars shaping Israel’s trajectory: business-led growth, smart—not blunt—fiscal restraint, and an expansionary but cautious monetary policy. An end to fighting, lower risk premiums, improving consumer confidence and a stronger shekel are already helping revive exports and encourage private consumption and investment.
Unemployment is expected to fall from 3% this year to 2.8% in the next two years—historic lows. Inflation is forecast to return to the target range next year at 2.4% and stabilize at 2% in 2027, with the OECD expressing confidence in the Bank of Israel’s policy approach.
However, the group raises concerns about the budget outlook. It forecasts a 2025 deficit of 5.4% of GDP—higher than the government’s target—and projects only a gradual decline to 4.1% in 2026. The OECD also warns that progress depends on maintaining security stability and growth momentum. Public debt, estimated at 68.3% of GDP this year, is projected to decline to 66.3% by 2027, though the OECD calls this forecast optimistic given uncertainty over the 2026 budget, defense costs and planned tax cuts.
The organization recommends avoiding across-the-board budget cuts and instead reducing specific subsidies, especially those for full-time yeshiva students, which it says weaken incentives to work. It also urges eliminating value-added tax exemptions, reinstating taxes on disposable plasticware and sugary drinks, and introducing congestion pricing in major metropolitan areas.
The OECD argues that Israel should shift spending from politically driven areas to long-term growth engines such as education, infrastructure, transportation, innovation and integrating underrepresented populations into the workforce.