Israel’s Economy Contracts 3.3% as Conflict with Iran Weighs on Growth

Israel’s economy contracted at an annualized rate of 3.3% during the first quarter of 2026, as the escalating conflict with Iran disrupted business activity, weakened consumer spending, and pressured overall economic output, according to data released by the country’s Central Bureau of Statistics.

The decline, while severe, was slightly better than economists’ expectations of a 4% contraction in a Reuters poll, offering limited relief amid growing concerns over the broader economic fallout from regional instability.

The slowdown marks a sharp reversal from 2025, when the Israeli economy expanded by 2.9% and policymakers anticipated a stronger recovery in 2026, with earlier projections pointing to growth above 5%. Those expectations were later scaled back following the intensification of military tensions with Iran.

Economic activity deteriorated significantly after hostilities involving the United States and Israel against Iran erupted on February 28, triggering weeks of ballistic missile exchanges that disrupted schools, commercial operations, and transportation networks across parts of the country.

Private consumption, a major driver of Israel’s economy, fell 4.7% during the quarter, reflecting weakening household demand and heightened uncertainty among consumers. Exports also declined 3.7%, while government spending dropped 4.8%, signaling broader pressure across multiple sectors of the economy.

In contrast, investment in fixed assets rose 12.6%, suggesting businesses continued to channel capital into long-term projects despite the volatile security environment.

On a per capita basis, the economy contracted 4.5% during the quarter, underscoring the depth of the economic slowdown and the strain on living standards.