The Israeli economy has rebounded strongly from the COVID-19 pandemic and has proven resilient to the repercussions of Russia’s war of aggression against Ukraine. Inflation has risen above the central bank’s target range amid strong demand and a tight labour market. Demographic challenges, related to the rising share of population groups with weak labour market attachment and ageing, will put pressure on future growth and fiscal sustainability. Addressing these challenges and reducing large labour market disparities will require setting appropriate work incentives and providing better support for working parents; improving skills at all stages of the learning cycle; as well as increasing mobility and reallocation towards high productivity jobs and firms, in particular in the high-tech sector. To maintain good health outcomes, emerging doctor shortages need to be addressed and the interaction between the public and private health care sector reformed. Reducing digital gaps across households and firms, by improving digital infrastructure, upgrading skills, raising competition and reducing financing constraints, can boost productivity growth and narrow the productivity divide between the high-tech sector and the rest of the economy. Fully harnessing Israel’s solar energy potential can help accelerate the green transition.
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