Iran campaign depresses Israels economy

Israel’s economy shrank by an annualized 3.3% in the first quarter of 2026 (shrinking 0.8% in the quarter), according to the initial assessment by the Central Bureau of Statistics. The sharp contraction, which ends a two-quarter streak of growth, mainly reflects the economic effects of the war with Iran in March and April.

A worrying figure is a 4.5% annualized decline in GDP per capita – the figure that most realistically reflects the country’s standard of living – compared with the last quarter of 2025. However, compared with the corresponding quarter of 2025, there has been an increase of 1.7% in GDP, and an even smaller increase of 0.6% in GDP per capita.

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The decline in the first quarter is consistent with economists’ estimates published in recent weeks, and shows a rapid reversal of the recovery trend in the second half of 2025. In the fourth quarter of 2025, GDP grew at an annual rate of 2.9%. Business output, which is usually used as an indicator of real activity in the private sector, fell by 3.1% in the first quarter of 2026 on an annualized basis, after a 5.4% increase in the fourth quarter of 2025.

The decline was evident in most consumption components. Private consumption spending shrank 4.7% on an annualized basis, after a similar decline of 4.6% in the fourth quarter, during which private consumption expenditure per capita fell by 5.8%. Current expenditure per capita, which includes food, housing, fuel and electricity, fell 10.1% on an annualized basis.

Public consumption spending contracted 4.8% year-on-year, mainly due to a 26.8% collapse in civilian consumption spending, including a 43.5% decline in civilian purchases – a sharp reversal from the 39.2% jump recorded in the fourth quarter of 2025. On the other hand, defense consumption spending increased 9% year-on-year, due to the war. The outlook now depends on the pace of recovery in the second quarter.

After the war with Iran last June, there was a sharp rebound of 12.4% year-on-year in the third quarter of 2025, which largely offset the contraction in the second quarter. Economists believe that a similar scenario is possible, but its depth and scale depend on whether there is renewed fighting with Iran and the pace of the economy returning to normal.

Published by Globes, Israel business news – en.globes.co.il – on May 17, 2026.

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