05.06.2026

Israel’s economy is expected to strengthen in 2026–2027 after the disruptions caused by the war, mobilisation of reservists and weak investment during 2024–2025. Growth should recover as supply constraints ease, private consumption rebounds, investment resumes and exports strengthen, especially in high-tech and services. Inflation is projected to return to the Bank of Israel’s target range, allowing cautious monetary easing. However, fiscal pressures remain significant because defence spending and interest costs are still well above pre-war levels. Public debt is expected to remain around 70% of GDP, while the external position remains supported by high-tech exports and services, but vulnerable to geopolitical shocks.

Indicators 2025 2026 2027
GDP growth (%, yoy) 2.8 3.8 5.5
Inflation (%, yoy) 3.1 2.2 1.8
Broad unemployment rate, prime working ages (%) 3.7 4.5 3.4
Fiscal balance (% of GDP) -5.2 -5.3 -4.4
Gross public debt (% of GDP) 69.0 70.5 70.5
Current account balance (% of GDP) 3.5 3.8 4.0
Growth recovers as supply constraints ease

Israel’s real GDP growth is estimated at around 2.8% in 2025, reflecting a gradual recovery after the sharp disruption caused by the war. The economy remained constrained by reservist mobilisation, weaker investment, labour shortages, uncertainty and disruptions to tourism and construction.

Growth is projected to strengthen to 3.8% in 2026 and 5.5% in 2027 as supply constraints ease and activity gradually returns toward its pre-war trend. Private consumption, fixed investment and exports are expected to recover, supported by the return of reservists to civilian employment, stronger business confidence and continued resilience in the high-tech sector.

High-tech and services remain key strengths

Israel’s medium-term growth remains supported by its high-tech sector, business services, research and development, and strong human capital. Services exports, especially technology-related exports, continue to provide an important buffer for the external position.

However, the war has highlighted structural vulnerabilities. Construction remains exposed to labour shortages, tourism is highly sensitive to security conditions, and parts of the economy depend heavily on public support and defence-related activity. Maintaining high productivity growth will require continued investment in education, infrastructure, transport, housing and integration of underrepresented groups into high-productivity employment.

Inflation returns to target

Inflation averaged around 3.1% in 2025, slightly above the Bank of Israel’s 1%–3% target range. It is expected to fall to 2.2% in 2026 and 1.8% in 2027, helped by a stronger shekel, lower energy-price pressures and easing supply constraints.

The Bank of Israel began cautious monetary easing in 2026, lowering the policy rate as inflation expectations moved back inside the target range. However, policy is likely to remain careful because inflation risks remain linked to energy prices, exchange-rate volatility, wage pressures, fiscal policy and geopolitical uncertainty.

Fiscal pressures remain elevated

The fiscal deficit remains high by Israel’s pre-war standards. Defence spending is expected to decline from its 2025 peak, but remain well above pre-conflict levels, while interest costs continue to rise. The deficit is projected at 5.3% of GDP in 2026 and 4.4% in 2027.

Public debt is expected to remain around 70.5% of GDP in 2026–2027. This is manageable for a high-income economy with strong institutions and deep domestic capital markets, but it is a clear deterioration from the pre-war fiscal position. A credible medium-term fiscal plan will be needed to stabilise debt and rebuild buffers.

External position remains a source of resilience

Israel’s current account is expected to remain in surplus, supported by services exports, high-tech activity and income from global investments. The external surplus provides an important buffer against geopolitical shocks and helps support confidence in the shekel.

However, the external outlook remains exposed to global technology demand, financial-market volatility, regional conflict, tourism losses and shipping or energy disruptions. A renewed escalation would quickly affect investment sentiment, tourism, fiscal spending and risk premiums.

Overall outlook

Israel’s outlook is improving, but remains highly dependent on security conditions. Growth is expected to strengthen in 2026–2027 as wartime supply constraints ease and private-sector activity rebounds. Inflation should return to target, allowing gradual monetary easing. The main medium-term challenge is fiscal: Israel must manage elevated defence and interest costs while preserving investment in productivity, infrastructure and human capital. Sustained progress will depend on restoring confidence, rebuilding fiscal buffers and maintaining the strength of the high-tech and export sectors.

Sources:

Bank of Israel, Research Department Staff Forecast, March 2026.

Bank of Israel, Monetary Committee Decision, May 2026.

International Monetary Fund, Israel: Staff Concluding Statement of the 2026 Article IV Mission, February 2026.

International Monetary Fund, World Economic Outlook, April 2026.

OECD, Israel Economic Snapshot, December 2025.

OECD, Foundations for Growth and Competitiveness: Israel, April 2026.