Macroeconomic and geopolitical developments – Weekly report, January 20, 2026
The past week was dominated by the December CPI and full-year inflation data for 2025. Annual inflation stood at 2.6%, returning to the target range for the first time in three years. The Bank of Israel has begun easing, but in our view further rate cuts are more likely toward the end of Q2 2026.
Geopolitically, Israel continues to navigate between Gaza and Iran. In Gaza, a Palestinian technocratic committee was announced as part of a U.S.-led framework, alongside the establishment of a Gaza Peace Council and an interim governing committee. However, key elements such as demilitarization, enforcement mechanisms, and funding remain unresolved, leaving the implementation of Phase B distant. At the same time, tensions with Iran escalated sharply late last week after the United States came close to launching a military strike. While the attack was ultimately postponed, the option remains on the table, leaving elevated the probability of renewed confrontation with Iran over the coming year.
On the domestic economic front, data released this week continued to point to a resilient but moderating economy. Labor market indicators showed that the labor market remains tight. High growth estimates for the second quarter (11% in annualized terms) were left unchanged in the third reading. Foreign trade data pointed to an acceleration in industrial exports and imports toward year-end, while consumer confidence weakened slightly in December but remained at a relatively high level. The Bank of Israel’s Monthly Index of Economic Activity rose by 0.3% in December, broadly in line with its long-term trend. The bottom line is that the economy continues to expand and gradually converge toward potential output, but without the sharp post-COVID rebound seen in 2022.
Fiscal performance in 2025 surprised on the positive side, with the deficit falling to 4.7% of GDP—below forecasts and the official target. Strong tax revenues and contained expenditure growth provide a solid starting point for 2026, even as the budget approval process remains a short-term political risk.
Looking ahead, on Wednesday, the quarterly labor supply-and-demand analysis is expected to confirm ongoing labor shortages. Early next week (Sunday), VAT-based revenue indices and industrial production data for November are likely to point to a gradual but uneven recovery in real activity.
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