IMF Projects Israel’s GDP to Grow to 4.8% in 2026, Warns of Downside Risks
The International Monetary Fund (IMF) has highlighted Israel’s notable economic resilience following the recent Gaza ceasefire, noting that economic activity has accelerated and growth is expected to strengthen in the near term.
In its latest staff report, the Fund projected Israel’s GDP growth to rise from 2.9 percent in 2025 to 4.8 percent in 2026, driven by pent-up private consumption and a rebound in investment, even as government consumption declines. Inflation is expected to moderate to just below 2 percent by mid-2026, helped by the shekel’s appreciation and easing capacity constraints.
However, the IMF warned that lingering conflict-related effects—such as elevated defense spending, extended military mobilization, higher risk premia, and constrained labor supply—pose risks to medium-term growth. These factors, combined with structural challenges like low labor market participation among certain groups, could limit Israel’s growth potential to around 3.5 percent over the medium term, below pre-conflict estimates of 4 percent.
Fiscal Consolidation Needed
The IMF noted a sharp deterioration in Israel’s fiscal position following the conflict. The central government deficit widened from a 0.6 percent surplus of GDP in 2022 to 6.8 percent of GDP in 2024, driven by higher defense spending and weaker revenues. Although consolidation measures helped reduce the deficit to 4.7 percent of GDP in 2025, the Fund said further action is needed to place public debt on a downward trajectory.
The draft 2026 Budget sets a deficit ceiling of 3.9 percent of GDP, with defense spending projected to decline to 6 percent of GDP. The IMF emphasized that additional fiscal measures—particularly revenue-focused adjustments—are crucial to safeguard civilian spending and stabilize public debt toward the Fund’s recommended medium-term target of 60 percent of GDP by the mid-2030s.
Structural Reforms Urged
The IMF called for urgent structural reforms to boost labor supply and productivity. Priorities include increasing workforce participation among Haredi men and Israeli-Arab women, strengthening business competitiveness, and supporting Israel’s high-tech and AI sectors. The Fund highlighted the need for enhanced STEM education, vocational training, and active labor market policies to address skill gaps and maximize economic potential.
Monetary and Financial Sector Stability
Israel’s moderately tight monetary policy has been effective in reducing inflation, the IMF noted, and gradual easing toward neutral is appropriate as supply pressures subside. At the same time, the Bank of Israel is advised to remain ready to adjust policy should inflation risks materialize.
Financial sector oversight remains critical, particularly due to banks’ concentrated exposure to real estate. The IMF recommended continued prudential monitoring, system-wide stress testing, and cautious expansion of bank competition to preserve financial stability. It also urged ongoing efforts to strengthen Israel’s anti-money laundering and counterterrorism financing frameworks.
Outlook and Risks
The IMF stressed that the economic outlook is contingent on regional stability. Renewed hostilities could tighten supply, reduce labor availability, depress confidence, and push inflation higher. Conversely, improved regional security, broader participation in the Abraham Accords, and large-scale demobilization could bolster labor supply, investment, and growth.
