Israel’s economy and financial markets are booming despite the Iran war

Earlier this month, the Bank of Israel cut its growth forecast for this year, citing conflicts in the Middle East.

But, remarkably for a country that has successfully fought for three years, the central bank still expects Israel’s economy to grow by 3.8% in 2026, even after a 1.4% contraction.

And the bank’s governor, Amir Yaron, told CNBC on April 16 that, if the conflicts in the region are resolved, Israel’s economy could return to 5.5% next year.

The IMF estimates that Israel’s economy will grow by 3.5% this year, compared to 2.3% in the United States and 1.3% in the EU. It also means that Israel’s GDP is predicted to surpass that of all G7 countries by 2026. Next year, the IMF predicts Israel will see economic growth of 4.4%, continuing to outpace many major advanced economies.

Israel has a much lower debt-to-GDP ratio than many other developed countries, with the IMF predicting a rate of 69.8% this year. Although a small uptick from 2025, it is significantly lower than the G7 rate of 123.7%.

The country’s unemployment rate also rose slightly to 3.2% in March, but fell below the US unemployment rate of 4.3% and the euro zone’s 6.2%.

Meanwhile, inflation has held firm in the two months since the start of the Iran war, easing slightly to 1.9% in March as rising oil prices fueled higher costs in the US, EU and UK. Israel’s inflation target range is 1% to 3%.

The country has been experiencing an ongoing conflict since the attack by the terrorist group Hamas on Oct 7. 2023, which triggered the Israeli attack on Gaza. The country attacked Iran and the US on Feb. 28 and fought with Iran’s proxy group Hezbollah in neighboring Lebanon as the war continued. Israel has also been hit by strikes by Yemen’s Houthis.

Keren Uziyel, a senior analyst at the Economist Intelligence Unit, told CNBC that while Israel’s economy has grown below capacity after years of war, a strong private sector, low inflation, a high-skilled workforce and steady growth have helped it bounce back.

“High-quality goods and services exports have been a major driver of the past two decades of strong growth and wealth creation but the economy has grown significantly in other areas, including the development of gas wells and defense exports,” said Uziyel.

“In 2025, Israel recorded its two largest foreign investment deals, both in cybersecurity: the $32 billion purchase of Wiz by Google and the $25 billion purchase of CyberArk by Palo Alto Networks, both completed in March 2026.”

He also added that Israel’s demographics are also in favor of a developed economy, with population growth of about 2% per year for the past two decades.

“By the standards of the developed world, the population is young,” he said. “Even on a per capita basis, economic performance has been strong over the past 20 years.”

If the ceasefire is cold – even weak – Uziyel said his team expects a strong recovery in the middle of the year and that the economy will grow by about 3% in 2026.

“Low unemployment, strong foreign demand for Israel’s technical goods and services and defense exports, strong global investment in technology and the urgency for households – especially high-income earners – from implementing major investment agreements will boost growth,” he said.

“The energy sector will also see significant investment in 2026-27, both in domestic renewable energy and to support higher production capacity and exports in the natural gas sector.”

But Joao Gomes, a professor of finance at the University of Pennsylvania’s Wharton business school, told CNBC that Israel’s economy is beginning to feel the impact of the Iran war, particularly a labor shortage among high-ranking workers recruited to the conflict and weak consumer spending due to security concerns. Tourism has also had a significant impact, he added, also weighing on growth and government revenue.

Gomes said the long-term economic impact will largely depend on the nature of any peace agreement in the Middle East and Israel’s perceived security.

“Government debt has increased dramatically and will require fiscal adjustment, but it remains manageable as long as Israel can secure a peace framework that allows for significant and sustained reductions in defense spending. [and] it maintains the confidence of foreign investors and their talent base,” he told CNBC in an email.

“Less important, but still important, will be the impact of the war on Israel’s international image and its attractiveness to world travelers.”

Gomes added: “Since there is no effective peace plan, the outlook is very difficult, there are risks including currency outflows, currency weakness, and possible inflation.”

EIU’s Uziel also said that, despite a strong macroeconomic background, the war is expected to disrupt various aspects of Israel’s economy.

“During the recent conflict, the government immediately postponed the economic shutdown of non-essential services due to concerns that a prolonged shutdown would deepen the recession and create more revenue,” he said. “However, we expect a significant drop in consumer activity in March-April (the usual peak holiday season).”

Uziyel said that while the Israeli government would like to “discredit” the Iranian regime and Lebanon’s Hezbollah, it is likely to align with the US in its next steps.

The Trump administration last week extended the deadline for the ceasefire to allow more time for peace talks with Iran. However, Trump told reporters on April 23 that he would not rush to make a deal or give a timeline for ending the war.

Uziyel told CNBC that, even if there is success in the talks, “any agreement will be very fragile and the risk of Israel acting cooperatively, at least in Lebanon, is high.”

Along with economic growth, Israel’s capital markets have also seen an influx, according to Karen Schwok, founder and CEO of Tel Aviv-based Lucid Investments family office.

Since the beginning of the year, the Tel Aviv 35 The index jumped nearly 20%, building on its 51.6% rally in 2025. During the two-month war with Iran, the index gained about 1%. The broader Tel Aviv 125 index is up more than 17% so far this year.

Meanwhile, i Israeli shekel It has gained about 7% against the US dollar so far this year, adding about 4% during the war so far, as investors have retreated to safe havens.

Tel Aviv 35’s current performance puts it ahead of many advanced market rivals, including all three of Wall Street’s major averages.

“The markets are not only stable, but they have strengthened significantly. The real change from shock, I would say, to normality,” he said, noting that foreign investors represent an important and growing part of Israel’s business activity.

“We definitely see foreign money returning to the local markets,” he added. “Income is concentrated in the technology, financial and defense sectors.”

Schwok told CNBC that he sees strong economic growth, demographics, and greater corporate cooperation as economic drivers, adding that he expects to see domestic defense growth continue in the coming years as Israel’s defense majors win contracts overseas.

“The currency is a real symbol,” he added. “Driven by remittances from other countries, [but] to me it’s an indicator of investor confidence.”

Schwok added that investor behavior has “changed structurally,” adding: “There is more emphasis on spending. [and] geographical diversity. I think [there’s also] it’s a global trend not to focus on geopolitical risk all the time.”