Israel’s economy shrinks in first quarter but seen rebounding after Iran war

The Bank of Israel sees 3.8% growth this year, down from a 5.2% estimate before the Iran war, depending on whether a ceasefire with Iran holds.

By Reuters and Algemeiner

Israel’s economy began 2026 with a slowdown, hit by war with Iran, but growth is expected to recover as long as the conflict does not reignite.

Gross domestic product contracted at an annualized rate of 3.3% in the first three months of 2026, the Central Bureau of Statistics said on Sunday, which is less severe than a 4% drop forecast in a Reuters poll of economists.

Israel’s economy grew 2.9% in 2025 and was expected to bounce back in 2026 to more than 5% growth after a cease-fire in October ended major fighting in the two-year Gaza war.

But growth took a hit after the US and Israel launched strikes against Iran on February 28, resulting in weeks of ballistic missile fire from Iran that closed schools and dampened business activity along with consumer spending.

“The Israeli economy began the year with strong momentum, with rapid growth in the first two months,” said Ofer Klein, head of economics and research at Harel Insurance and Finance.

“The lifting of most restrictions in April and the improvement in economic activity since then… indicate a relatively quick return to positive growth in the current quarter,” said Klein, who raised his growth estimate for this year to 3.5% from 3.2%.

The Bank of Israel sees 3.8% growth this year, down from a 5.2% estimate before the Iran war, depending on whether a ceasefire with Iran holds.

Jonathan Katz, chief economist at Leader Capital Markets, said he expected 4% growth.

“This is a modest GDP contraction compared to the second quarter of 2025 – the last Iran confrontation in June of 2025 – when GDP contracted by over 10%,” he said, adding that industrial exports bounced back in April.

The statistics bureau reported on Friday that the annual inflation rate held steady at 1.9% in April.

Some economists believe interest rate reductions could resume as early as May 25, the Bank of Israel’s next rate decision meeting.

Israeli financial markets do not trade on Sunday.

The shekel has appreciated 20% in the past year to 2.91 per dollar, a 33-year high.

Tel Aviv share indices are close to all-time highs reached earlier in May.

In the first quarter, consumer spending fell 4.7%, exports declined 3.7% and government spending shed 4.8 percent. Investment in fixed assets rose 12.6 percent.

On a per capita basis, the economy shrank 4.5% in the quarter.