Israel’s economy and financial markets are booming despite Iran war

Earlier this month, the Bank of Israel cut its growth forecast for this year, citing hostilities in the Middle East.

But remarkably for a country that has been effectively at war for almost three years, the central bank still expects Israel’s economy to grow by 3.8% in 2026, even after a 1.4 percentage point decline.

The bank’s governor, Amir Yaron, also told CNBC on April 16 that Israel’s economy could recover to 5.5% next year if conflicts in the region are resolved.

The IMF estimates that the Israeli economy will grow by 3.5 percent this year, while the US will grow by 2.3 percent and the EU by 1.3 percent. This also means that Israel’s GDP is predicted to outperform all G7 countries in 2026. Israel is projected by the IMF to record economic growth of 4.4% next year and will continue to outperform many major developed economies.

Israel’s debt/GDP ratio is much lower than many other developed countries; The IMF estimates that this rate will be 69.8% this year. Although it is a slight increase from 2025, it is much lower than the G7’s rate of 123.7%.

The country’s unemployment rate also increased marginally in March, reaching 3.2%, but falling below America’s 4.3% unemployment rate and the euro zone’s 6.2% unemployment rate.

Meanwhile, inflation has remained stable in the two months since the start of the Iran war, falling slightly to 1.9% in March, while rising oil prices have further pushed up overall costs in the US, EU and UK. The target inflation range in Israel is 1% to 3%.

The country has been grappling with constant conflict since the attack by the militant group Hamas on October 7, 2023, which led to the Israeli offensive on Gaza. The country struck Iran alongside the United States on February 28 and fought Iran’s proxy group Hezbollah in neighboring Lebanon as the war continued. Israel has also been the target of attacks by the Houthis in Yemen.

Keren Uziyel, senior analyst at the Economist Intelligence Unit, told CNBC that although the Israeli economy is growing below its potential after years of war, a resilient private sector, low inflation, a highly skilled workforce and sustainable growth are helping Israel recover from the crisis.

“Exports of high-tech goods and services have been the main factor behind the strong growth and wealth creation experienced over the past two decades, but the economy has also grown strongly in other areas, including the development of gas resources and defense exports,” Uziyel said. he said.

“In 2025, Israel recorded the two largest-ever foreign investment deals in cybersecurity: Google’s $32 billion acquisition of Wiz and Palo Alto Networks’ $25 billion acquisition of CyberArk, both completed in March 2026.”

He added that Israel’s demographic structure is also suitable for a developed economy, with population growth averaging close to 2% per year for most of the last 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 last 20 years.”

Uziyel said that if the ceasefires continue, albeit weakly, his team expects a fairly strong recovery by mid-year and the economy will grow by about 3% overall in 2026.

“Low unemployment, strong foreign demand for Israel’s technology products and services and defense exports, strong global investment in technology and windfall benefits to households, especially high-income earners, from the execution of several major investment deals will support growth,” he said.

“The energy sector will also see significant investment in 2026-27, both in domestic renewable energy capacity and in supporting further production and export capacity in the natural gas sector.”

But Joao Gomes, a finance professor at the University of Pennsylvania’s Wharton School of Business, told CNBC that Israel’s economy is starting to feel the effects of the Iran war, particularly labor shortages among prime workers mobilized for the conflict and weak consumer spending due to security concerns. He added that tourism has also been severely affected, putting further pressure on growth and government revenues.

Gomes said the long-term economic impact will largely depend on the nature of the peace agreement in the Middle East and Israel’s perceived security.

“Government debt has increased significantly and will require fiscal adjustment, but will remain manageable provided Israel provides a peace framework that allows for a significant and sustained reduction in defense spending.” [and] It “maintains foreign investor confidence and talent base,” he told CNBC via email.

“Less critical but still relevant will be the impact of the war on Israel’s international reputation and attractiveness to global travelers.”

Gomes added: “In the absence of a successful peace arrangement, the outlook is more challenging, with risks such as capital outflow, currency weakness and possibly inflation.”

EIU’s Uziyel also said that despite the strong macroeconomic environment, the war is expected to harm Israel’s economy in several ways.

“During the last round of conflict, the government relatively quickly reversed economic closures of non-essential services out of concerns that longer closures would deepen the economic contraction and hit fiscal revenue harder,” he said. “We still expect a significant contraction in consumer activity during March-April (normally a busy holiday season).”

Uziyal said that although the Israeli government wants to “more decisively humiliate” both the Iranian regime and Lebanon’s Hezbollah, it will likely side with the United States in the next steps.

The Trump administration last week extended the ceasefire with Iran to allow more time for peace talks. But Trump told reporters on April 23 that he would not rush to make a deal or offer a timeline for ending the war.

Uziyel told CNBC that even if there was a breakthrough in the talks, “any ceasefire would be extremely fragile and there is a high risk that Israel will act unilaterally, at least in Lebanon.”

Along with growth in the economy, Israel’s capital markets have also seen an influx, according to Karen Schwok, founder and CEO of the Tel Aviv-based Lucid Investments family office.

Since the beginning of the year, Tel Aviv 35 The index increased by approximately 20%, continuing its 51.6% rise in 2025. During the two-month war with Iran, the index increased by around 1%. More broadly, the Tel Aviv 125 index is up more than 17% so far this year.