Macroeconomic and geopolitical developments – Weekly report, September 22, 2025

ISRAEL - Report 22 Sep 2025 by Sani Ziv

Last week was dominated by geopolitics, as Prime Minister Netanyahu’s “Super Sparta” speech raised fears of economic fallout and deepened Israel’s diplomatic isolation. Markets reacted negatively, while the failed strike on Hamas leaders in Doha further strained ties with Arab states. We outlined three scenarios for Gaza’s future: a diplomatic settlement with international involvement (low likelihood at this stage), continuation of the current conflict under Israeli security control (the baseline scenario), or full occupation of Gaza—an extremely costly option that appears less likely given domestic opposition and international constraints.

On the macro side, Israel’s labor market remained exceptionally tight: unemployment fell to 2.9%, vacancies reached a three-year high, and negative migration continued to constrain supply. Annual inflation eased back into the 1–3% target range at 2.9%, although services inflation remained sticky, while home prices declined for a fourth consecutive month. The current account surplus collapsed to just $0.6bn in Q2, the weakest since 2012, as exports and aviation services slumped. Despite resilient FDI inflows, record capital outflows by residents pose a risk to the exchange rate. Equity markets declined, the shekel weakened modestly, and the 10-year government bond yield held around 4.2%. For the Bank of Israel, the return of headline inflation to target is offset by tight labor supply, external risks, and fiscal pressures, making a rate cut at the September 29 meeting still unlikely.

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