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By Steven Scheer
JERUSALEM (Reuters) -Israel's economy looks set to rebound over the next two years if geopolitical tensions ease, but it needs structural reforms to support government finances and sustain growth over the long term, the OECD said on Wednesday.
Damaged by Israel's wars with the Palestinian militant group Hamas in Gaza and Hezbollah in Lebanon, Israel's economy grew only 0.9% in 2024.
An OECD report forecast growth of 3.4% in 2025 and 5.5% in 2026, saying an end to the wars should help high-tech exports, consumer spending and investment. The Bank of Israel projects 4% growth this year and 4.5% in 2026.
OECD Secretary General Mathias Cormann presented the survey, published every other year, to Israel's Social-Economic Cabinet, chaired by Finance Minister Bezalel Smotrich.
Smotrich said the report outlined the challenges and opportunities that Israel must address to ensure growth continues, and Israel was keen to work with the OECD.The OECD projected inflation, stoked partly by supply shocks, at 3.7% this year, - above its 1-3% annual target - and 2.9% in 2026.
It recommended the Bank of Israel, which meets next week, avoid reducing interest rates until price pressures are contained.
"There is little space for reducing rates given the inflation outlook, with the prospect of strong demand from private consumption and exports amid continuing labour shortages in 2025," the report said.
The OECD also said any fiscal consolidation would have to take into account a jump in military spending. It recommended Israel implement a host of taxes such as on sugary drinks and disposables, as well as traffic congestion fees.
For longer-term growth, the OECD said Israel must liberalise its markets and bring more people into employment by enforcing core curricula in its Arab and ultra-Orthodox Jewish schools.
It said Israel should abolish government-mandated price controls on some products and enact pro-competition reforms.
The OECD said the high-tech sector, particularly around artificial intelligence, was a key driver of growth but would increasingly require "a stronger basis of high-level competencies and academic research" as well as more comprehensive regulation of AI.
(Reporting by Steven Scheer; editing by Mark Heinrich and Kevin Liffey)
