Israeli soldiers secure the opening of a tunnel near the border with Israel in the northern Gaza Strip on December 15, 2023.
Rich Levi getty images
Earlier this month, the Bank of Israel lowered its growth forecast for this year, citing hostilities in the Middle East.
But, remarkably for a country that has been on effective war footing for nearly three years, the central bank still expects Israel’s economy to grow 3.8% in 2026, even after a 1.4 percentage point decline.
And the bank’s governor, Amir Yaron, told CNBC on April 16 that, if conflicts in the region are resolved, Israel’s economy could grow 5.5% next year.
The IMF estimates that Israel’s economy will grow 3.5% this year, compared with 2.3% for the United States and 1.3% for the European Union. This also means that Israel’s GDP is projected to outperform all G7 countries in 2026. Next year, Israel is projected by the IMF to have economic growth of 4.4%, which will continue to outperform many major developed economies.
Israel’s debt-to-GDP ratio is very low compared to many other developed countries, with the IMF estimating the rate at 69.8% this year. Although a slight increase from 2025, it is significantly lower than the G7’s rate of 123.7%.
The country’s unemployment rate also rose slightly to 3.2% in March, but it is below the US’s 4.3% unemployment rate and the euro zone’s 6.2%.
Meanwhile, inflation has been steady in the two months since the Iran war began, easing slightly to 1.9% in March, while rising oil prices pushed up broader costs in the US, EU and Britain. The target inflation range in Israel is 1% to 3%.
The country has been engaged in sustained conflict since an attack by the terrorist group Hamas on 7 October 2023, which led to the Israeli assault on Gaza. The country joined with the US in attacking Iran on February 28 and fighting the Iranian proxy group Hezbollah in neighboring Lebanon as the war continued. Israel has also been targeted by attacks by Yemen’s Houthi rebels.
Karen Uziel, a senior analyst at the Economist Intelligence Unit, told CNBC that although Israel’s economy has grown below its potential after years of war, a resilient private sector, low inflation, a highly skilled labor force and sustained growth have helped it recover from the crisis.
“High-tech goods and services exports have been the main driver behind the strong growth and wealth creation of the past two decades, but the economy has grown strongly in other sectors, including the development of gas resources and defense exports,” Uziel said.
“In 2025, Israel recorded its two largest foreign investment deals, both in cybersecurity: the $32 billion purchase of Wiz by Google and the $25 billion purchase of CyberArk by Palo Alto Networks, both completed in March 2026.”
He said Israel’s demography is also favorable for a developed economy, with population growth averaging close to 2% per year over the past two decades.
“By developed world standards, the population is relatively young,” he said. “Even on a per capita basis, economic performance has been strong over the past 20 years.”
If the ceasefire holds – even if weakly – Uziel said his team expects a fairly strong recovery by the middle of the year and the economy expanding by about 3% overall in 2026.
He said, “Low unemployment, strong external demand for Israel’s technology goods and services and defense exports, strong global investment in technology and the realization of several large investment deals will boost growth with windfall benefits to households – especially those with higher incomes –.”
“The energy sector will also see significant investment in 2026-27 to support domestic renewable capacity and more production and export capacity in the natural gas sector.”
But Joao Gomes, a finance professor at the University of Pennsylvania’s Wharton Business School, told CNBC that Israel’s economy was beginning to feel the impact of the Iran war, particularly a labor shortage among prime-age workers who have been mobilized for the conflict and weak consumer spending due to security concerns. He said tourism has also been badly affected, impacting development and government revenue.
Gomes said the long-term economic impact would largely depend on the nature of any peace. Settlement in the Middle East and Israel’s Perceived Security.
Stock prices on an electronic ticker board outside the Tel Aviv Stock Exchange Ltd. (TASE) in Tel Aviv, Israel, on Thursday, Oct. 9, 2025. Israel and Hamas reached a deal for a ceasefire and the release of all hostages held by the militant group in Gaza, a major step towards ending a two-year war that has devastated the Palestinian territory, destabilized the Middle East and sparked global protests. Photographer: Kobi Wolf/Bloomberg via Getty Images
Bloomberg | Bloomberg | getty images
“Government debt has increased significantly and will require fiscal adjustment, but remains manageable, provided Israel can secure a peace framework that allows for a significant and sustained reduction in defense spending (and) preserves the confidence of foreign investors and its talent base,” he told CNBC by email.
“The impact of the war on Israel’s international reputation and its appeal to global travelers will be less significant, but still relevant.”
Gomes said: “In the absence of a successful peacekeeping arrangement, the outlook is more challenging, with risks including capital outflows, currency weakness and most likely inflation.”
The EIU’s Uzial also said that, despite a strong macroeconomic backdrop, the war is expected to hit various aspects of Israel’s economy.
“During the latest round of clashes, the government relatively quickly rolled back the economic shutdown of non-essential services out of concern that a prolonged shutdown would deepen the economic contraction and hit fiscal revenues more heavily,” he said. “Nonetheless, we expect a significant contraction in consumer activity during March-April (typically the peak holiday season).”
Uziel said that although Israel’s government would like to “more decisively degrade” both the Iranian regime and Hezbollah in Lebanon, it would likely broadly align with the US in its next steps.
The Trump administration last week extended the ceasefire deadline to allow more time for peace talks with Iran. However, Trump told reporters on April 23 that he would not rush to make a deal or give a timeline for ending the war.
Uziel told CNBC that, even if there is a breakthrough in the talks, “any ceasefire will be extremely fragile and the risk of Israel taking unilateral action is high, at least in Lebanon.”
market boom
Along with growth in the economy, Israel’s capital markets have also seen inflows, according to Karen Shvok, founder and CEO of Tel Aviv-based Lucid Investments Family Office.
since the beginning of the year tel aviv 35 The index is up about 20%, based on its 51.6% rally in 2025. During the two-month war with Iran, the index has increased by about 1%. The broader Tel Aviv 125 index has risen more than 17% so far this year.
meanwhile, israeli shekel It has gained about 7% against the US dollar so far this year, up from about 4% during the war, even as investors have flocked back to the safe-haven greenback.
Tel Aviv 35’s year-to-date performance puts it well ahead of many major developed-market rivals, including all three of Wall Street’s major averages.
“Markets have not only been resilient, but they have also been remarkably strong. I would say this is a real shift from shock to normalization,” she said. He said foreign investors represent a significant and growing share of business activity in Israel.
“We are definitely seeing foreign capital returning to the local market,” he said. “The flows are concentrated in technology, financial and defense-related sectors.”
Shvok told CNBC that she sees strong economic growth, demographics and major corporate dealmaking as economic drivers, adding that she expects the domestic defense boom to continue in the coming years as Israeli defense majors secure contracts abroad.
“The currency is a real signal,” he said. “This is driven by the return of foreign inflows, (but) for me it is also an indicator of investor confidence.”
Schwock said investor behavior “has changed structurally,” adding: “There’s more emphasis on liquidity (and) more geographic diversification. I think (there’s also) a global trend of not being focused on geopolitical risk all the time.”
