Israel Economy Shrinks 3.3% in Q1

Israel's economy contracted at an annualized rate of 3.3% in the first quarter of 2026, reversing a downwardly revised 2.9% growth in the fourth quarter of 2025. It was the first contraction in the economy since the second quarter of 2025, due to the impact of the war with Iran. Consumer spending dropped 4.7%, government spending fell 4.8%, and exports declined 3.7%. By contrast, fixed investment grew 12.6%. The Bank of Israel currently expects the economy to grow by 3.8% this year, depending on whether the ceasefire reached last month with Iran holds. Last year, the country’s economy grew 2.9% in 2025 and was expected to rebound in 2026 to more than 5% growth following a ceasefire in October that ended major fighting in the two-year Gaza war.

Israel's economy expanded at an annualized rate of 3.3% in Q4 2025, below previous estimates of 4.2% growth and falling sharply from a upwardly revised 12.7% in the previous quarter. Domestic demand weakened, with a 3% contraction in consumer spending and a 5.7% decline in fixed assets investments. In turn, government spending increased 1.8%, while business GDP increased 6%. On the external side, imports of goods and services, excluding defense imports, ships, aircraft and diamonds decreased 2.8% and exports of goods and services, excluding start-ups and diamonds increased 20.2%. For the full year, the economy expanded 2.9%, accelerating from 1% growth in the previous year.

Israel’s economy expanded at an annualized rate of 4.2% in Q4 2025, exceeding initial estimates of 4%, but marking a sharp slowdown from a downwardly revised 12.1% growth in Q3. The moderation was largely driven by weaker domestic demand, with private consumption contracting 3.7% and fixed asset investment declining 4.0%. These declines were partially offset by a modest 1.5% increase in public consumption. Meanwhile, business GDP showed resilience, rising 7.2% and providing some support to overall economic activity. On the external front, exports of goods and services, excluding start-ups and diamonds, rose 24.5%, while imports fell 2.9%, excluding defense-related imports, ships, aircraft, and diamonds. For the full year, Israel’s economy grew 2.9%, revised down from initial estimates of 3.1%, but accelerating from 1% growth in the previous year.