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

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

But surprisingly for a country that has been on an effective war footing for almost three years, the central bank still expects Israel’s economy to grow by 3.8% in 2026, even after the 1.4 percentage point downgrade.

And the bank’s president, Amir Yaron, told CNBC on April 16 that Israel’s economy could rebound to 5.5% next year if the regional conflict is resolved.

The IMF predicts that Israel’s economic growth rate will be 3.5% this year, compared to 2.3% for the US and 1.3% for the EU. This also means that Israel’s GDP is projected to exceed all G7 countries in 2026. The IMF predicts that Israel will continue to outperform many major developed countries next year, with economic growth of 4.4%.

Israel’s debt-to-GDP ratio is much lower than many other developed countries, with the IMF expecting it to reach 69.8% this year. Although it will rise slightly from 2025, it will be much lower than the G7 rate of 123.7%.

The country’s unemployment rate also rose slightly, reaching 3.2% in March, but remains below the 4.3% unemployment rate in the United States and 6.2% in the euro zone.

Inflation, meanwhile, has held steady in the two months since the start of the Iran war, falling slightly to 1.9% in March as rising oil prices pushed up broader costs in the US, EU and UK. Israel’s target inflation range is 1% to 3%.

The country has been embroiled in an ongoing conflict since an attack by the militant group Hamas that led to Israel’s attack on Gaza on October 7, 2023. The country joined the United States in attacking Iran on February 28, and as the war continues, it is fighting Iran’s proxy group Hezbollah in neighboring Lebanon. Israel is also a target of attacks by Yemen’s Houthis.

Keren Uziel, a senior analyst at the Economist Intelligence Unit, told CNBC that while Israel’s economy is growing below its potential after years of war, a resilient private sector, low inflation, a highly skilled workforce and sustained growth are helping Israel recover from the crisis.

“Exports of high-tech products and services have been the main driver of strong growth and wealth creation over the past two decades, but the economy has also grown strongly in other areas, such as the development of gas resources and defense exports,” Uziel said.

“In 2025, Israel recorded two of the largest foreign investment deals in history in the cybersecurity space: Google’s $32 billion acquisition of Wiz and Palo Alto Networks’ $25 billion acquisition of CyberArk, both of which closed in March 2026.”

He added that Israel’s demographics are also favorable for a developed economy, with population growth averaging nearly 2% per year for most of the past 20 years.

“The population is relatively young by developed country standards,” she says. “Even on a per capita basis, economic performance has been strong over the past 20 years.”

Uziel said that even if the weak ceasefire holds, the team expects a fairly strong recovery by the middle of this year, with the overall economy expected to expand by about 3% in 2026.

“Low unemployment, strong external demand for Israeli technology products and services and defense exports, strong global technology investment, and windfall benefits for households, especially high-income earners, from the realization of several large investment deals will drive growth,” he said.

“The energy sector will also see significant investments in 2026-27 to support the expansion of production and export capacity in the domestic renewable energy and natural gas sectors.”

However, Joanne Gomez, a finance professor at the Wharton School of Business at the University of Pennsylvania, told CNBC that the Israeli economy is beginning to feel the effects of the Iran war, particularly among middle-aged workers mobilized for the conflict, and a decline in consumer spending due to labor shortages and safety concerns. Tourism has also been severely affected, adding further weight to growth and government revenues, he added.

Gomez said the long-term economic impact will largely depend on the content of the Middle East peace agreement and Israel’s perception of security.

“Government debt has increased significantly and requires fiscal adjustment, but remains manageable if Israel can secure a peace framework that allows for deep and sustained reductions in defense spending and maintains the confidence of foreign investors and the talent base,” he told CNBC in an email.

“Less important, but still important, will be the impact the war will have on Israel’s international reputation and appeal to tourists around the world.”

Gomez added: “If the peace deal is not successful, the outlook is even more bleak, with risks including capital outflows, currency depreciation and possibly inflation.”

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

“During the recent conflict, governments were relatively quick to reduce the economic shutdown of non-essential services out of concern that a prolonged shutdown would deepen the economic contraction and cause an even bigger hit to fiscal revenues,” she said. “Still, we expect consumer activity to contract significantly in March and April (typically the peak holiday season).”

Uzziel said the Israeli government wants to “more decisively disparage” both the Iranian regime and Lebanon’s Hezbollah, but the next step is likely to be largely aligned with the United States.

The Trump administration last week extended the ceasefire deadline to give more time to peace talks with Iran. But President Trump told reporters on April 23 that he was in no hurry to strike a deal or offer a timeline for ending the war.

Uzziel told CNBC that even if there was progress in talks, “any ceasefire would be very fragile and there would be a high risk that Israel would act unilaterally, at least in Lebanon.”

Karen Schwock, founder and CEO of the Tel Aviv-based Lucid Investments family office, says that as the economy grows, capital is also flowing into Israel’s capital markets.

Since the beginning of this year, Tel Aviv 35 The index rose about 20%, building on a 51.6% recovery in 2025. During the two-month war with Iran, the index rose by about 1%. The overall Tel Aviv 125 Index is up more than 17% since the beginning of the year.

on the other hand, israeli shekel It has risen nearly 7% against the greenback since the beginning of the year, and has risen about 4% over the course of the war, even as investors flocked to the safe-haven dollar.

The Tel Aviv 35’s year-to-date performance has significantly outperformed rivals in several major developed markets, including Wall Street’s three major averages.

“The market is not only resilient, but surprisingly strong. You could say this is a real transition from shock to normalization,” he said, noting that foreign investors account for a significant and growing share of Israel’s trading activity.

“Foreign capital is definitely coming back into the local market,” she added. “Inflows are concentrated in the technology, financial and defense-related sectors.”

Schwock told CNBC that he sees strong economic growth, demographic trends and deals with large companies as driving forces for the economy, adding that he expects the domestic defense boom to continue in the coming years as Israel’s defense prime minister secures contracts abroad.

“The currency is a real signal,” she added. “This is due to the return of foreign inflows, (but) to me it is also an indicator of investor confidence.”

Mr. Schwock added that investor behavior is “changing structurally,” adding, “There’s more emphasis on liquidity (and) more geographic diversification. I think there’s also a global trend (of) not always focusing on geopolitical risk.”