Israel’s economy contracted at an annualised rate of 3.3% in the first quarter of 2026, the country’s Central Bureau of Statistics announced on Sunday, May 17, as the conflict with Iran dragged on output across multiple sectors. The figure came in better than the 4% decline forecast in a Reuters poll of economists. On a per capita basis, the economy shrank 4.5% over the same period.
The contraction follows the launch of a joint U.S.-Israeli military campaign against Iran on February 28, which triggered weeks of retaliatory ballistic missile fire from Tehran. Schools closed, businesses suffered, and consumer activity fell sharply across the country during the fighting.
Consumer spending dropped 4.7% in the first quarter, according to the Central Bureau of Statistics. Exports declined 3.7% and government spending fell 4.8%. The one bright spot was investment in fixed assets, which rose 12.6% over the same period.
“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, according to Reuters. Klein revised his full-year growth estimate upward to 3.5% from 3.2%, citing improved conditions since April.
“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,” Klein told Reuters.
Jonathan Katz, Chief Economist at Leader Capital Markets, forecast 4% growth for the full year and offered a comparative assessment of the damage. “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 told Reuters. He added that industrial exports had bounced back in April.
The Bank of Israel currently projects 3.8% growth for 2026, contingent on the ceasefire forged with Iran last month holding through the remainder of the year. That figure is down from the 5.2% growth estimate the central bank held before the Iran war began, Reuters reported.
Regional and Global Impact
The Q1 figures arrive as Israel attempts to stabilise an economy that has now fought wars on multiple fronts over two years. The shekel has appreciated 20% over the past year to 2.91 per dollar, a 33-year high, according to Reuters. Tel Aviv share indices were near all-time highs reached earlier in May, though Israeli financial markets do not trade on Sundays.
Annual inflation held steady at 1.9% in April, the Central Bureau of Statistics reported on Friday. Some economists now expect the Bank of Israel to resume interest rate reductions at its next rate decision meeting on May 25, Reuters noted.
Background
Israel’s economy grew 2.9% in 2025 and had been projected to expand by more than 5% in 2026 after a ceasefire in October 2025 ended major fighting in the two-year Gaza war. Those projections collapsed after the February 28 strikes against Iran. The 2026 conflict followed a shorter confrontation in June 2025 — during which GDP fell more than 10% on an annualised basis — and a severe fourth-quarter 2023 contraction of 19.4% annualised triggered by the October 7 Hamas attacks. Defence spending reached nearly 8% of GDP in 2024 and has remained elevated. Israel’s 2026 national budget was set at NIS 144 billion, the Jerusalem Post reported.
What Happens Next
The Bank of Israel’s next rate-setting meeting is scheduled for May 25, and Reuters reported that some economists believe a rate cut could be announced that day. The central bank’s 3.8% full-year growth forecast rests explicitly on the Iran ceasefire remaining intact. Katz told Reuters he expects a rebound to 4% growth for 2026 overall. The Central Bureau of Statistics will publish further quarterly figures as 2026 progresses, with markets watching whether the April and May recovery signals are sustained into Q2.
