Israel’s Economy Shrinks Unexpectedly Well Below Growth Forecasts

Israel’s economy contracted sharply in the second quarter of 2025, as the 12-day war with Iran triggered a nationwide disruption of commercial activity and dragged down consumer spending and investment.

According to data released Sunday by the Israeli Central Bureau of Statistics, gross domestic product (GDP) shrank by 3.5% on an annualized basis, seasonally adjusted, a stark contrast to the 0.2% median growth estimate predicted by a Bloomberg survey of six economists.

The economic decline came on the heels of a surprise Israeli offensive launched on June 13 targeting Iran’s nuclear infrastructure and military installations. 

Israel labeled Iran’s nuclear program a "strategic existential threat." In retaliation, Iran launched multiple ballistic missile attacks, prompting mass sheltering across Israeli cities and a near-complete shutdown of economic activity.

The war’s economic toll was felt most acutely in private consumption, which plunged 4.1%, and

Gross fixed capital formation, which plummeted 12.3%, as reported by the statistics bureau.

The war also introduced fresh uncertainty into regional stability, rattling investor sentiment and delaying major infrastructure and housing projects.

The Bank of Israel still projects 3.3% GDP growth for 2025, but the Finance Ministry last week revised its outlook downward to 3.1%, citing the war’s impact and growing fiscal pressures. Achieving even these revised figures will now depend on a strong economic rebound in the second half of the year, a challenging feat amid ongoing military escalations.

Further compounding economic uncertainty is Israel’s announced preparation for a large-scale ground operation in Gaza, with the stated aim of "eliminating Hamas presence." Military analysts estimate the move could displace over one million Palestinians and require the mobilization of tens of thousands of reservists, placing additional strain on public spending and labor market productivity.

With defense spending surging and domestic consumption slowing, Israel faces a delicate balancing act: restoring economic momentum while navigating escalating regional conflict.