Dim Amor

The Bank of Israel published in March 2026 its annual report for 2025 – a comprehensive document reviewing the state of the Israeli economy in a year marked by the continuation of hostilities since October 2023 and their wide-ranging economic implications. The report portrays a complex picture of an economy operating under prolonged emergency conditions, demonstrating relative resilience while simultaneously experiencing ongoing erosion of its underlying fundamentals.

According to the data, the Israeli economy recorded growth of 2.9% in 2025, a significant improvement compared to just 1% growth in 2024. The business sector also showed recovery, expanding by 3.2%. However, the pace of growth remained below the long-term trend, with one of the key contributing factors being severe supply constraints in the labor market.

The report points to a widespread labor shortage, stemming in part from large-scale reserve mobilization and the absence of Palestinian workers. This reality created a “tight” labor market, characterized by low unemployment rates alongside substantial wage pressures, which affected business activity and the overall pace of recovery.

On the price front, moderation was observed: inflation in 2025 stood at 2.6% and returned to the target range after exceeding it during parts of the year. According to the report, this moderation resulted from a combination of restrictive monetary policy, an appreciation of the shekel, and a decline in Israel’s risk premium. At the same time, the Bank of Israel maintained a relatively high interest rate of 4.5% for most of the year, only beginning a gradual reduction toward its end – first to 4.25% and subsequently to 4% in January 2026.

Alongside macroeconomic stabilization, the report emphasizes the heavy cost of the war. The cumulative impact on GDP since its onset is estimated at approximately 8.6% of GDP, amounting to around NIS 175 billion. When viewed through the lens of citizens’ welfare, the loss reaches an average of approximately NIS 35,000 per capita over the period.

The fiscal arena also reflects complexity. The budget deficit declined to 4.7% of GDP but remains elevated compared to levels that characterized the pre-war years. Meanwhile, the debt-to-GDP ratio rose to 68.5%, reflecting a notable increase and raising concerns about the continued expansion of public debt.

The report notes that the reduction in the deficit was achieved primarily through tax increases and spending cuts, but warns that the structural deficit remains higher than the level required to stabilize the debt ratio. This implies that without additional measures, there is a risk of continued growth in the debt burden in the coming years.

At the same time, the financial system and capital markets showed relatively positive performance. Stock prices increased, credit volumes expanded, and financial risk remained relatively low. These indicators reflect a partial return of investor confidence, partly against the backdrop of a moderation in hostilities במהלך the year.

Nevertheless, the report underscores a series of long-term structural challenges. Among them are low labor productivity, the need to increase labor force participation among certain population groups, and the necessity for substantial investment in infrastructure and human capital. These issues are further intensified by technological developments, particularly artificial intelligence, which are expected to reshape the labor market and skill requirements in the future.

In addition, the report points to a shift in the migration balance. During 2024-2025, a negative trend was recorded, with an increase in the number of Israelis leaving the country. This development carries potential implications for the labor market, housing demand, and future economic growth rates.

Within this context, the housing market is indirectly reflected through macroeconomic conditions and demand dynamics. The assessment that properties including a safe room (Mamad) command higher demand is reinforced in light of the prevailing security reality, although the report does not provide a direct quantitative estimate of price gaps. Nonetheless, the very shift in demand patterns reflects households’ adaptation to ongoing security risks.

In conclusion, the Bank of Israel’s 2025 report portrays an economy that maintains relative resilience even under prolonged wartime conditions, albeit at a considerable economic and social cost. Alongside signs of recovery, the report highlights a cumulative erosion and underscores the need for comprehensive, long-term strategic measures-both in the fiscal sphere and across employment, productivity, and human capital investment-in order to mitigate emerging risks and ensure economic stability in the years ahead.