Israel’s economy is expected to strengthen following the halting of the war in Gaza against the Hamas terror group, but a resumption of regional conflicts remains a key concern to growth prospects, the International Monetary Fund (IMF) warned in a report on Thursday.
“Israel’s economy has demonstrated notable resilience. Following the Gaza ceasefire, economic activity accelerated markedly, and staff expect growth to firm in the near term,” the IMF said in its initial country report on the Israeli economy. “But there are downside risks, including from potential renewed regional tensions.”
The ceasefire between Israel and Hamas has remained fragile since its implementation in October. The truce halted two years of war that began with the devastating Hamas-led attack on Israel on October 7, 2023, and cost the economy around NIS 250 billion ($80 billion).
“The conflict’s legacy is substantial: defense spending remains elevated, risk premia are higher, and labor supply is constrained by extended military mobilization and reduced availability of non-Israeli workers,” the IMF cautioned. “These pressures would compound longstanding structural challenges — such as persistently low labor market participation among specific groups [ultra-Orthodox and Israeli Arab communities] — and weigh on the medium-term economic outlook.”
Following the ceasefire agreement and assuming no renewed hostilities, the IMF expects the Israeli economy to grow 4.8 percent in 2026, up from 2.9% in 2025, helped by pent-up private consumption, a rebound in investment, and a decline in government consumption. The forecast is lower than the Bank of Israel’s 5.2% growth projection for 2026.
Over the past month, regional tensions spiraled over the Iranian regime’s lethal crackdown on protests in the country and amid indications of a potential American strike on the Islamic Republic. Iran warned that should the US attack, it would respond by targeting Israel and US bases in the region.
The IMF emphasized that “over the medium-term, staff project growth at around 3.5%, down from 4% pre-conflict, reflecting the lingering conflict-related effects—including elevated defense spending and mobilization, higher risk premia, and reduced availability of non-Israeli workers.”
The IMF called on the government take additional steps for fiscal consolidation to reduce Israel’s debt burden, which ballooned during the war, while “safeguarding adequate civilian spending.”
The IMF’s initial country report was presented to Finance Minister Bezalel Smotrich and Bank of Israel Governor Amir Yaron. The IMF’s detailed annual country report will be published at a later stage.
Commenting on the IMF report, Smotrich said that the forecasts “reflect the strength of the economy and the fruits of the responsible fiscal and monetary policies we have led in the past three years.”
“As reflected in the state budget that is currently being debated in the Knesset, we will continue to lead with fiscal responsibility, maintain stability, and promote courageous reforms that will encourage employment, growth, and competition,” Smotrich vowed.
Source:
www.timesofisrael.com