Israel's Current Economy Condition

As of May 2025, Israel's economy is navigating a complex landscape marked by resilience in certain sectors and significant challenges stemming from ongoing geopolitical tensions and global economic shifts.

Economic Growth and Outlook

In the first quarter of 2025, Israel's economy grew at an annualized rate of 3.4%, a notable improvement from the 1.9% growth in the previous quarter. This uptick indicates a rebound from the economic slowdown experienced during the height of the conflict with Hamas in Gaza, which began in October 2023. Despite this growth, the Bank of Israel has adjusted its 2025 GDP growth forecast to 3.5%, down from an earlier projection of 4.0%, reflecting ongoing uncertainties.

The OECD projects a similar growth rate of 3.4% for 2025, with expectations of acceleration to 5.5% in 2026, contingent upon the easing of geopolitical tensions. However, the Aaron Institute for Economic Policy offers a more conservative estimate, forecasting a 1.7% growth rate for 2025, citing potential fiscal deficits and rising external debt. 

Inflation and Monetary Policy

Inflation remains a pressing concern, with April 2025 figures showing a rise to 3.6%, surpassing the Bank of Israel's target range of 1–3%. This increase is attributed to higher costs in airfares, utilities, and taxes, exacerbated by supply disruptions linked to the ongoing conflict. In response, the Bank of Israel has maintained its benchmark interest rate at 4.5%, aligning with a cautious approach similar to that of the U.S. Federal Reserve. While financial markets anticipate a decline in inflation to 1.8% within a year and potential rate cuts later in 2025, the central bank emphasizes the need for clear signs of sustained disinflation before adjusting rates.

Fiscal Health and War-Related Costs

The financial impact of the conflict has been substantial. The Bank of Israel estimates war-related costs from 2023 to 2025 could reach up to $55.6 billion, representing approximately 10% of the nation's economy. This includes increased military expenditures and support for affected populations. The fiscal deficit widened sharply in 2024 due to these expenses but is expected to narrow in subsequent years as the economy stabilizes. 

Trade Relations and International Pressures

Israel's trade relationships are under strain amid international criticism of its actions in Gaza. Key allies, including the European Union, the United Kingdom, and Canada, have signaled potential reviews or suspensions of trade agreements. The EU, Israel's largest trading partner, is reassessing its trade deal, while the UK has paused discussions on a new agreement. These developments pose risks to Israel's export-driven economy, particularly in sectors like electronics and agriculture. The Washington Post

Labor Market and Employment

The labor market has shown resilience, with the unemployment rate slightly increasing to 3.0% in April 2025 from 2.9% in March. However, the mobilization of 300,000 reservists and the suspension of Palestinian work permits have led to labor shortages, particularly in construction and agriculture. To mitigate these shortages, Israel has sought to recruit workers from countries like India and Sri Lanka. 

Banking Sector and Financial Stability

Despite the challenging environment, Israel's banking sector remains robust. Bank Hapoalim, one of the country's largest banks, reported a significant increase in first-quarter profits, driven by strong credit growth and financing income. However, the banking regulator has advised caution, maintaining restrictions on dividend payouts to ensure sufficient capital buffers amid ongoing uncertainties. ReutersReuters

High Cost of Living: Inflationary pressures have exacerbated the cost of living, prompting calls for policy interventions to address housing and consumer goods prices.

Red Sea Shipping Disruptions: Houthi attacks have severely impacted shipping routes through the Red Sea, leading to increased costs and delays. The port of Eilat has suffered significant losses, with reports indicating a potential bankruptcy and mass layoffs. 

Capital Flight: Political instability and security concerns have led to a notable outflow of capital. Reports indicate that approximately 1,700 millionaires have left Israel since 2023, seeking investment opportunities elsewhere.

Judicial Reforms and Investor Confidence: Controversial judicial reforms have sparked domestic unrest and raised concerns among investors about the rule of law and economic stability. This has contributed to currency depreciation and stock market volatility. 

Israel's economy in 2025 demonstrates a capacity for resilience amid adversity, with sectors like banking and technology showing strength. However, the nation faces significant challenges, including geopolitical tensions, inflationary pressures, and structural economic issues. Addressing these challenges will require prudent fiscal management, diplomatic engagement to stabilize trade relationships, and reforms aimed at enhancing economic inclusivity and resilience.