Israel’s economy contracted at an annualized rate of 3.3% in the first quarter of 2026, according to figures published by the Israel Central Bureau of Statistics, as the war with Iran and weeks of missile attacks disrupted economic activity across the country.

The decline was slightly less severe than economists had forecast. A Reuters poll had projected a contraction of approximately 4%.

The data point to a sharp slowdown following hopes of a strong post-war recovery after Israel’s economy grew by 3.1% in 2025.

Consumer Spending and Exports Fall Sharply

According to the CBS figures:

• Private consumption fell by 4.7%
• Exports declined by 3.7%
• Government spending dropped by 4.8%
• GDP per capita shrank by 4.5%

At the same time, investment in fixed assets rose sharply by 12.6%, indicating continued long-term investment activity despite the economic slowdown.

Economists attributed much of the contraction to the military confrontation with Iran, which began at the end of February and led to weeks of ballistic missile attacks, school closures and disruptions to businesses throughout Israel.

Recovery Hopes Weakened by Regional Conflict

Before the escalation with Iran, Israel’s economy had been expected to rebound strongly in 2026 following the Gaza ceasefire reached in late 2025.

The economy expanded by 3.1% in 2025 after recording only 1% growth in 2024. Growth last year was driven by:

• a 7.1% increase in investment
• a 5.9% rise in exports
• stronger business activity following the ceasefire with Hamas

Fourth-quarter 2025 GDP growth was revised upward to an annualized 12.7%, supported in part by a 33% jump in exports.

Bank of Israel Still Forecasts Growth for 2026

Despite the weak first quarter, the Bank of Israel still projects economic growth of approximately 3.8% in 2026, assuming the current ceasefire with Iran remains in place.

Analysts said the latest figures reflect the Israeli economy’s resilience under wartime conditions, but warned that continued regional instability could further weigh on growth, investment and consumer confidence during the remainder of the year.