Finance Ministry Cuts 2025 Growth Forecast Amid War Uncertainty - Drops growth to 3.1%

The Chief Economist Division at Israel’s Ministry of Finance, headed by Dr. Shmuel Abramson, has revised downward its 2025 growth forecast to 3.1%, citing ongoing security instability and economic disruptions. This new estimate is lower than the Bank of Israel’s current forecast of 3.3% and reflects a continuing trend of weakened economic expectations amid prolonged conflict.

In its previous forecast released in June, the ministry projected 3.6% growth for 2025. The new projection thus represents a cut of 0.5 percentage points. When compared to the original estimate used during the formulation of the 2025 state budget—which forecasted 4.3% growth—the current forecast represents a steep 1.2 percentage point reduction.

2026 Forecast Revised Upward

In contrast, the growth forecast for 2026 has been raised to 5.1%, up from a previous estimate of 4.4%, signaling hopes for a recovery year following the war and accompanying economic shocks.

The updated outlook comes ahead of the planned revision to the 2025 state budget, in which the Ministry of Finance intends to add NIS 28 billion to the defense budget, in light of continued military operations in Gaza and heightened tensions with Iran.

Forecast Based on Inaccurate War Assumptions

According to the Ministry of Finance, the original economic modeling for 2025 was based on the assumption that "Operation Gideon’s Chariots" would end during the first half of the year, and that the conflict would not expand to additional fronts. In practice, the war in Gaza continues, and confrontation with Iran has escalated, disrupting earlier forecasts.

The ministry further noted that economic activity was significantly reduced during the second quarter, largely due to a two-week national shutdown in June, during the peak of fighting with Iran. While some recovery occurred in the third quarter, increased reserve mobilization is expected to negatively impact productivity and output during the remainder of the year.

Unemployment Expected to Rise Slightly in 2025

In addition to slower growth, the Ministry of Finance now estimates that the unemployment rate will rise slightly in 2025 to 3.6%, up from the current level. However, this increase is expected to moderate in 2026, falling back to around 3.2%.

Further Economic Data Expected Soon

The Central Bureau of Statistics (CBS) is expected to publish updated national accounts data for the first half of 2025 in the coming weeks, which will help clarify the true impact of the war on quarterly GDP.

Meanwhile, the Bank of Israel’s composite index, which serves as an early predictor of business activity, already points to a slowdown in the third quarter—a trend that began even before the outbreak of the war with Iran.