IMF cuts Israel's 2026 growth forecast to 3.5 percent
The IMF cut Israel’s 2026 growth forecast to 3.5 percent as war-related tensions, labor shortages and higher defense spending weigh on the economy.
The International Monetary Fund cut Israel’s 2026 growth forecast to 3.5 percent from 4.8 percent, paired with a 2.3 percent inflation forecast for 2026 and a caution that renewed intensification of tensions remains a key downside risk.
The IMF linked the weaker outlook to hostilities involving Iran, Hezbollah and Hamas, along with defense spending that remains elevated and a labor supply constrained by military mobilization and fewer non-Israeli workers. Even with the shekel at a more than three-decade high against the dollar, inflation could rise temporarily because of higher energy prices and supply constraints.
Labor-force participation and skill levels remain low, especially among Haredi men and Arab-Israelis, and Israel has a dual economy: world-class high-tech industries alongside lower-productivity sectors that leave output vulnerable to sector-specific shocks. Investment-sensitive industries, travel and tourism, and employers already struggling to find workers are likely to feel the strain first, while public finances face the added pressure of defense outlays and weaker momentum in tax revenues.
IMF mission discussions ended on Feb. 5, 2026, after the Gaza ceasefire had helped economic activity accelerate markedly, but the staff report was not completed until June 10 and the Executive Board considered it on June 24 before the June 30-July 1 release. In February, boosting labor supply and closing skill gaps, especially among Israeli-Arab women and Haredi men, had become increasingly urgent, and additional fiscal consolidation would be needed to put debt on a downward trajectory while protecting civilian spending.
Prime Minister Benjamin Netanyahu has said Israel will lower corporate and value-added taxes to support growth after stronger-than-expected tax collection. Israel’s VAT rate rose from 17 percent to 18 percent in 2025, and tax relief would need to be balanced against the IMF’s call to rebuild fiscal buffers after a period of war-related spending and uncertainty.
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