Israel economy slows after Iran war, rebound expected later in 2026

Israel’s economy shrank sharply at the start of 2026 as the war with Iran disrupted daily life, knocked consumer demand and raised fresh doubts about how long the recovery can last. The Central Bureau of Statistics said gross domestic product contracted at an annualized rate of 3.3 percent in the first three months of the year, a smaller decline than the 4 percent drop economists had expected but still a clear reversal after 2.9 percent growth in 2025.

The damage was broad. Consumer spending fell 4.7 percent, exports declined 3.7 percent and government spending dropped 4.8 percent, even as fixed-asset investment rose 12.6 percent. On a per-capita basis, output fell 4.5 percent, a sign that households felt the shock more acutely than the headline GDP figure suggests. The downturn followed the U.S. and Israeli strikes on Iran on February 28, which triggered weeks of ballistic missile fire from Iran and disrupted schools, business activity and spending across the country.

Economists are still betting on a rebound later in the year, but the forecast depends heavily on conflict not reigniting. Ofer Klein, head of economics and research at Harel Insurance and Finance, said, “The Israeli economy began the year with strong momentum,” and argued that the lifting of restrictions in April and recent improvement in activity point to a relatively quick return to positive growth in the current quarter. He raised his 2026 growth estimate to 3.5 percent from 3.2 percent. Jonathan Katz, chief economist at Leader Capital Markets, said he expected 4 percent growth and noted that the latest contraction was modest compared with the second quarter of 2025, when GDP fell by more than 10 percent during the previous Iran confrontation.

Financial markets are also signaling confidence, at least for now. Inflation held at 1.9 percent in April, the shekel has gained about 20 percent over the past year to a 33-year high, and Tel Aviv share indices are near record levels. That optimism rests on the same assumption running through official forecasts: that the fighting pauses long enough for demand, labor supply and investment to normalize.

The Bank of Israel’s March 30 staff forecast projected 3.8 percent growth in 2026 and 5.5 percent in 2027, assuming Operation Roaring Lion and the fighting in Lebanon ended toward the end of April and that no further Iranian front fighting erupted. The central bank kept its policy rate unchanged at 4.00 percent and said credit-card purchases had dropped about 20 percent at the start of the campaign before partially recovering after two weeks. It also said the 2026 budget needed an extra NIS 39 billion for defense costs tied to the operation. Even the earlier January forecast, which was more upbeat at 5.2 percent growth for 2026, had already rested on the October ceasefire that brought reservists back into the labor market and eased supply constraints. The OECD, meanwhile, projected 4.9 percent growth in 2026 but warned the outlook remained vulnerable to renewed warfare and dependent on disciplined fiscal policy.