Israel’s economy at war: macro scenario amid the war with Iran
A conflict lasting several weeks is expected to cause a moderate contraction in GDP in Q2 and Q3 2025. Annual growth is projected to slow to just 0.3%.
The fiscal deficit is expected to widen to 7% of GDP, driven by surging defense spending and a drop in tax revenues—pushing the debt-to-GDP ratio to around 75% by year-end.
Temporary inflationary pressures are likely to rise due to a depreciation in the shekel, higher oil prices, and supply disruptions. The Bank of Israel is expected to keep rates unchanged until Q4.
Risk premiums are expected to rise, and a credit rating downgrade appears increasingly likely.
The intensity of the economic impact will depend on the duration of the war: A swift and decisive end to the war could limit the damage to the economy, while a prolonged war of attrition would significantly deepen the hit to GDP and credit metrics.
Meanwhile, markets appear to be pricing in a scenario of a swift end to hostilities, with a decisive outcome that would remove both the missile threat and the nuclear threat to Israel. Such an outcome could have a long-term effect for Israel’s economy, including reduced geopolitical risk premiums and a quicker return to growth.
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