The International Monetary Fund expects Israel's economy to rebound to 4.8% growth in 2026, after an anticipated 2.9% expansion in 2025, provided the ceasefire in Gaza endures and there is no return to widespread hostilities. The IMF's assessment, released in a report on Thursday, attributes the projected acceleration to a pickup in household spending and investment in the wake of the October ceasefire.
According to the IMF, economic activity "accelerated markedly" after the ceasefire and, on the central assumption of no renewed hostilities, near-term growth should strengthen as "pent-up private consumption and a rebound in investment, while government consumption declines" drive demand.
At the same time, the fund warned that the two-year conflict with the Palestinian militant group Hamas has left a significant legacy. It noted persistently high defence spending, labour supply constraints stemming from extended military mobilisation and a reduced availability of non-Israeli workers. These pressures, the IMF said, would add to longer-standing structural challenges and could weigh on the medium-term outlook.
"These pressures would compound longstanding structural challenges - such as persistently low labour market participation among specific groups - and weigh on the medium-term economic outlook," the IMF said, citing low participation among ultra-Orthodox Jewish men and Arab women.
While the ceasefire has stopped most fighting, the IMF emphasised that it has not ended all breaches; both sides have accused the other of violating aspects of the agreement. The fund explicitly highlighted downside risks to growth, including the possibility of renewed regional tensions.
Fiscal and political considerations
The IMF said additional fiscal consolidation will be necessary for Israel's debt burden, which rose during the war, to decline over time while preserving adequate civilian spending. Parliament last week gave initial approval to the 2026 state budget draft, but deep divisions within the governing coalition left the question of final approval by the March 31 deadline uncertain. The IMF noted that failure to pass the budget by the end of March would trigger new elections.
Monetary policy and inflation outlook
The IMF judged that a moderately tight monetary stance has been appropriate to bring inflation back toward the official 1-3% target range. Inflation stood at 2.6% in December. The fund expects inflation to fall below 2% this year as demand pressures are more than offset by the lagged effects of a strong shekel and by easing capacity constraints.
The Bank of Israel has reduced its benchmark interest rate by 25 basis points in each of its last two meetings to 4%. The IMF's forecast has the policy rate at 3.5% by the end of 2026. The fund supported a gradual lowering of the policy rate toward neutral as inflationary pressures and supply constraints ease, while urging the central bank to remain ready to tighten again if inflation unexpectedly rises.
"With inflationary pressures and supply constraints easing, gradually lowering the policy rate toward neutral is appropriate," the IMF said. "However, the Bank of Israel should remain ready to adjust course should inflation surprise on the upside."
Comparisons with domestic forecasts
The IMF's 2026 growth projection of 4.8% sits below the Bank of Israel's forecast of 5.2% growth in 2026. The central bank projects 2.8% growth in 2025. The IMF's outlook incorporates the post-ceasefire uptick but stresses that elevated defence spending, labour constraints and political uncertainties could temper the recovery.
Implications for markets and sectors
Fiscal consolidation needs and higher defence spending will have implications for public finances and the composition of government expenditure, with potential spillovers to bond markets and borrowing costs.
Constraints on labour supply could influence sectors sensitive to workforce availability and wage dynamics.
Monetary easing over the forecast horizon - assuming inflation continues to moderate - may affect borrowing conditions and investment decisions across the economy.
The IMF's report underscores a conditional recovery: growth is set to strengthen if the ceasefire persists and political and fiscal challenges are managed, but the outlook is vulnerable to security shocks and to the outcome of budget negotiations that remain unresolved.