Israel records 3.1% economic growth in 2025, outpacing OECD average

Investment activity rebounded strongly after contracting during the war period. Fixed capital investment jumped 8.1% for the year after declining 5.5% in 2024.

By Pesach Benson, TPS

Israel’s economy expanded 3.1% in 2025, marking a recovery from the previous year’s modest growth as the country continued to navigate the aftermath of the Gaza war, according to data released Monday by the Central Bureau of Statistics.

Perhaps most striking is that Israel achieved growth exceeding the OECD’s forecast average for member countries despite, rather than because of, its current circumstances.

The growth rate represented a significant acceleration from the 1.0% expansion recorded in 2024, when the economy was heavily impacted by conflicts with Hamas, Hezbollah, Yemen-based Houthis, and Iran.

GDP per capita rose 1.7% as the population grew 1.4%, bringing per capita output to NIS 208,900 ($67,600) in current prices.

The business sector drove much of the economic expansion, with output increasing 3.4% compared to 2.1% growth in 2024.

The recovery was particularly evident in the final quarter of 2025, when GDP surged 4.0% on a seasonally adjusted annualized basis compared to the third quarter, following a robust 12.7% increase in the previous quarter.

Investment activity rebounded strongly after contracting during the war period. Fixed capital investment jumped 8.1% for the year after declining 5.5% in 2024.

Residential construction led the recovery with a 16.0% increase, reversing a sharp 17.4% decline the previous year. Investment in machinery and equipment rose 12.6%, while information and communications technology investment climbed 11.3%.

Private consumption grew at a more moderate 2.6% pace, down from 3.9% growth in 2024, suggesting households remained cautious.

Per capita private consumption increased just 1.2% for the year, and the fourth quarter saw a 3.6% contraction in private consumption on a seasonally adjusted basis.

Israel’s 1.7% per capita GDP growth surpassed the OECD’s forecast average of 1.3% for member countries in 2025.

Yet beneath the headline growth figures lies a more fragile reality.

The modest per capita consumption gains and the fourth-quarter contraction suggest households remain cautious about their economic prospects despite the broader recovery.

And while defense spending fell 1.3% after last year’s extraordinary 36% surge, current levels remain far above pre-war norms, effectively establishing a new and more expensive baseline for national security costs.

This permanently elevated security spending constrains the government’s ability to invest in other priorities, even as the overall deficit — though improved to 5.2% of GDP from 8.1% — remains dangerously high by developed economy standards.

The external sector showed renewed vigor as exports of goods and services rose 5.9% after falling 4.7% in 2024. Tourism provided a bright spot, with tourism service exports surging 26.6% as visitors returned following the intense conflict period.

Excluding diamonds and startup companies, exports increased 6.1%. Industrial exports, excluding diamonds, advanced 6.5% after declining 3.7% the previous year.

Public consumption expenditure increased 1.7%, a dramatic slowdown from the 11.8% surge in 2024. Defense-related consumption declined 1.3% after skyrocketing 36.0% in 2024 due to war expenses, including reserve duty compensation and combat costs.

The statistics bureau noted that while 2025 still featured above-normal defense spending, it represented a relative moderation from the previous year’s extraordinary levels.

The government’s fiscal position improved but remained strained. The overall budget deficit totaled NIS 110.0 billion ($35.63 billion), or 5.2% of GDP, down from NIS 161.9 billion ($52.44 billion), representing 8.1% of GDP in 2024.

The current account deficit narrowed to 4.3% of GDP from 6.5% the previous year.