Israel’s Economy Contracts 3.3% in Q1 Amid Iran Conflict

Israel’s economy slowed at the start of 2026, affected by conflict with Iran, though growth is expected to recover if hostilities do not resume, according to a Reuters report by Steve Scheer.

Israel's economic momentum weakened after the United States and Israel launched strikes against Iran on Feb. 28.

Gross domestic product (GDP) contracted at an annualized rate of 3.3% in the first quarter of 2026.

However, Israel’s Central Bureau of Statistics said Sunday that the contraction was less severe than the 4% decline forecast in a Reuters poll of economists.

Israel’s economy grew 2.9% in 2025 and had been expected to rebound to more than 5% growth in 2026 after a ceasefire in October ended major fighting in the two-year Gaza war.

Economic momentum weakened after the United States and Israel launched strikes against Iran on Feb. 28, triggering weeks of ballistic missile fire that disrupted schools, businesses and consumer activity.

“The Israeli economy began the year with strong momentum, with rapid growth in the first two months,” said Ofer Klein, head of economics and research at Harel Insurance and Finance.

“The lifting of most restrictions in April and the improvement in economic activity since then indicate a relatively quick return to positive growth in the current quarter,” Klein said, adding that he raised his 2026 growth forecast to 3.5% from 3.2%.

The Bank of Israel expects the economy to grow 3.8% this year, down from a previous 5.2% estimate made before the Iran conflict, depending on whether the ceasefire holds.