Analysts split on Israel's recovery prospects

According to the latest forecast by the International Monetary Fund (IMF), Israel’s economy will grow by 3.9% in 2026. This puts Israel ahead of Germany for the expected nominal rise in GDP (i.e., without taking inflation into account), and it is not the most optimistic forecast. The Bank of Israel has released a higher forecast, of 4.7% growth, while the Ministry of Finance sees a dramatic recovery for the economy and growth of 5.1%.

Two camps

In the context of a rebound from war, 3.9% growth is not all that impressive, and it would seem that two camps are forming among the forecasters. The entire economy is in a state of uncertainty, and is dependent both on local political conditions and on the global economic environment.

According to the IMF forecast, GDP per capita in Israel next year will be $64,000, which is above Germany. But in terms of purchasing power parity (PPP), Israel is some way below the largest economy in Europe.

The IMF has recently published updates to its forecasts for every country for 2025 and 2026. For 2025, for which there are already official figures for two quarters, the IMF has revised its forecast for Israel downwards, from 2.9% growth to just 2.5%, but it raised its growth forecast for 2026 from 3.6% to 3.9%. The IMF has not, however, published any supporting analysis for the revision, or even a breakdown of how the different parts of the economy (exports, private consumption, government expenditure) will contribute to growth. It can be assumed, though, that the rise stems from the ceasefire declared in the Gaza Strip that could bring an end to the war that has lasted for two years.

As mentioned, the IMF’s growth forecast is well below the official forecasts in Israel. The Bank of Israel’s 4.7% forecast for 2026 includes a jump of now less than 7% in private consumption.

The Ministry of Finance, which as mentioned is even more optimistic, states in its revised forecast published in August that 2026 “will see strong economic recovery, after which the growth rate will start to converge on the economy’s growth potential.”

Three reasons for pessimism

Leader Capital Markets chief economist Jonathan Katz is in the pessimists’ camp, and sees growth of just 3.8% in 2026, slightly below even the IMF’s forecast. He says that the IMF usually sticks close to the Bank of Israel’s forecast, but that this time around it decided to break with custom and present a lower forecast, which he shares. This, he says, is for three reasons: “The first is that global activity is going to moderate, even more than forecast by the IMF, mainly in the US and Europe, but we will probably see moderation in growth even in China in comparison with 2025.” The IMF does expect low growth (in Chinese terms) for China of just 3.7% for 2025, but sees that climbing to 5% in 2026. Katz says that Israel’s industrial exports are dramatically affected by global demand, and will therefore be hampered by global growth trends.

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“The second reason is that although many reserve soldiers are being released, it does not look as though the Palestinian workers will return. And of course there will still be a need for extensive mobilization of the reserves for routine security. That will limit the labor supply in the Israeli economy. The third reason, which people don’t sufficiently take into account, is fiscal policy. The budget has been very expansionary for two years, which almost by definition supports growth. Public consumption has been high, and the has been a great deal of support for evacuated families and reservists. That will of course stop as soon as the war ends. The private sector is meant to boost its activity, but not enough if we take into account the shrinking of public expenditure.

“What is surprising in the Bank of Israel forecast,” Katz says, “is the statement that private consumption will grow by 7% in real terms in 2026, which is huge. They had a similar forecast a year ago for 2025, when they expected the war to end at the beginning of the year.” He connects this to the interest rate question as well. “There is a fear on the part of the governor of the Bank of Israel of excessive demand when the war ends, and of demand driven inflation,” he says, but claims that the rise in private consumption “will probably be more like 4%, or 4.5% at most. I don’t see how we get to what the Bank of Israel is forecasting.”

On the positive side, Katz says, “We still have the economy’s engine, which is exports of technology and cybersecurity services, and of course defense exports. But investment will rise by less than everyone expects, because there’s a shortage of labor. So I’m more conservative in my forecast. It’s still decent growth, of course, but in the context of exiting a war, the gap in GDP is big. We lost 4-5% of GDP because of the war, and that’s very significant.”

By contrast, Meitav chief economist Alex Zabezhinsky, like the Bank of Israel, sees growth of 4.7% in 2026. But it’s hard to miss the division into camps between the various players, with one camp seeing fairly moderate growth because of international difficulties and a slower recovery of private consumption, while the other expects more dramatic recovery with the end of the war. All the forecasters acknowledge, however, that at the moment great uncertainty prevails.

Published by Globes, Israel business news – en.globes.co.il – on October 20, 2025.

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