Israel recorded a contraction in economic output in the first quarter of 2026, the Central Bureau of Statistics reported on Sunday, with gross domestic product falling at an annualised rate of 3.3%. That marks a sharp reversal from the 2.9% expansion posted in 2025.
The bureau's data show further signs of cooling in household demand. Consumer spending declined 4.7% over the first three months of 2026. On a per-capita basis, the overall economy contracted by 4.5% over the same period.
Prior to the outbreak of hostilities with Iran, the economy had been expected to rebound strongly in 2026, with forecasts calling for growth in excess of 5% following a 2.9% expansion in 2025. That 2025 growth came after an October 2025 ceasefire with Hamas that ended two years of war in Gaza.
Those expectations were upended by the U.S.-Israeli war with Iran, which began at the end of February. The onset of that conflict has coincided with weeks of ballistic missile fire from Iran that disrupted business operations across the country.
The disruption from the missile attacks and associated security impacts is explicitly cited as a factor weighing on economic activity and spending in the opening quarter.
Reflecting the changed outlook, the Bank of Israel has revised its projection for 2026. The central bank now anticipates the economy will expand at a 3.8% pace this year, conditional on a ceasefire with Iran holding.
The incoming data underline the sensitivity of Israel's near-term growth trajectory to geopolitical developments. Consumer demand, business continuity during periods of direct attack, and the durability of any ceasefire are central to whether the economy can return to the previously expected stronger pace of expansion.
For policymakers and market participants, the first-quarter results highlight the tension between pre-conflict recovery expectations and the immediate costs of renewed hostilities that have affected both aggregate demand and output per person.