Israel Faces Rising Economic Costs from Iran Conflict

Israel’s economy contracted more sharply than initially estimated during the first quarter of 2026, according to revised figures released by the Israeli Central Bureau of Statistics, reflecting the growing economic impact of the war with Iran.

The second assessment of economic performance showed that Israel’s gross domestic product (GDP) shrank at an annualised rate of 3.8% in the first quarter of 2026 compared with the final quarter of 2025. The figure was worse than the preliminary estimate, which had pointed to a 3.3% contraction.

The revised data indicate that the conflict with Iran placed increasing pressure on economic activity, weighing on several sectors and leading to a larger slowdown than previously expected.

On a per-capita basis, taking population growth into account, GDP fell by around 5% on an annual basis compared with the previous quarter. Consumer spending also declined by 5%, while business output dropped by 3.8%.

According to the statistics bureau, the main difference between the first and second estimates was linked to the performance of the business sector. The decline in business output was revised from 3.3% to 3.8%, while export growth forecasts were significantly reduced.

Expected growth in exports of goods and services was cut from 5.6% in the initial estimate to just 1.9% in the revised assessment.

The bureau said GDP data were affected by the war with Iran, which began on 28 February. The conflict interrupted the strong growth recorded in the previous quarter and weakened economic activity amid rising military costs and broader pressures on the economy.

Separate figures from Israel’s Ministry of Finance showed that the country’s cumulative budget deficit over the past 12 months reached 4.2% of GDP, equivalent to 89.5 billion shekels, or about $25 billion.

Officials have warned that the deficit could widen further due to increased military spending, additional government allocations and compensation packages for businesses affected by the conflict.

According to estimates cited by Yedioth Ahronoth, the war with Iran may cost the Israeli economy around 65 billion shekels, or approximately $18 billion. The Ministry of Finance has so far estimated the cost at around 35 billion shekels.

The ministry also reported that the fiscal deficit for the 12 months ending in May stood at 3.75% of GDP, amounting to 8.3 billion shekels.

Government spending from January through May 2026 reached 259.5 billion shekels, up 1.4% from 255.8 billion shekels recorded during the same period in 2025.

The latest figures point to mounting economic challenges as Israel continues to deal with the financial and economic consequences of the conflict.