Israel’s economy to shrink in first 3 months of year amid war with Iran, Finance Ministry says

Israel’s economy is set to shrink in the first three months of the year as the war with Iran is taking longer than expected, the Finance Ministry’s chief economist says.

The country’s economy is expected to end the first quarter with negative growth of 9.5 percent in annual terms and 2.5% in quarterly terms, based on current indicators of economic activity and past war experience, the Finance Ministry’s chief economist Shmuel Abramzon says.

Earlier this month, the Finance Ministry lowered the growth forecast for 2026 to 4.8% from 5.2%, on the assumption that the war with Iran and fighting with Lebanon would be short-lived.

“Since this scenario did not materialize and the fighting was prolonged and is still ongoing, the Chief Economist’s Department updated its economic growth forecasts under a number of possible scenarios depending on the continuation of the fighting,” the Finance Ministry says.

Abramzon projects Israel’s economy will grow between 3.3% to 3.8% in 2026, depending on the length of wars on multiple fronts. In 2027, the economy is expected to grow at a pace of 5.3% to 6.1%, depending on security developments.