Forecasts of a Sharp Contraction in the Israeli Economy by 9.5% in the First Quarter of 2026

SadaNews - The Hebrew newspaper "Kalkalist" reported that the Israeli Ministry of Finance has downgraded its estimates for economic performance, expecting a contraction in GDP by 9.5% year-on-year during the first quarter of 2026, amid the repercussions of what is known as the "Harry War." The estimates also indicate a decline of 2.5% on a quarterly basis, according to Sada's economic translation.

According to "Kalkalist," the Office of the Chief Economist presented three potential scenarios for the economic trajectory, based on developments in the war in Iran and Lebanon.

In the "short war" scenario, which assumes that operations in Iran will end within two weeks and in Lebanon within a month, the economy is expected to grow by 3.8% in 2026, rising to 5.3% in 2027.

In the second scenario, according to Sada's economic translation, it is assumed that the war in Iran will end within two weeks while continuing in Lebanon until the end of June, where the ministry estimates, according to "Kalkalist" and the translation of "Sada Economy," that growth will reach 3.5% in 2026, before rising to 5.7% the following year.

In the longer-term scenario, assuming that the war in Iran extends for another month and confrontations in Lebanon continue until the end of June, growth is expected to decline to 3.3% in 2026, before rising to 6.1% in 2027.

This update comes concurrently with the approval of the national budget in the Knesset, amid anticipation for the Bank of Israel to issue its updated forecasts, and in light of skepticism from economic entities regarding the previous estimates of the Chief Economist's office, according to Sada's economic translation.

Estimates issued in early March indicated growth ranging between 4.7% and 4.8%, before facing widespread criticism. According to "Kalkalist" and the translation of "Sada Economy," the Chief Economist’s office later acknowledged that those forecasts were made in the early days of the war, when optimistic estimates prevailed regarding its short duration.

Ministry experts believe that the economy may recover by 2027 if no further rounds of escalation occur, while warning that prolonged security tensions will lead to a slower and more limited recovery.

Conversely, "Kalkalist" indicated that some estimates still consider the Ministry of Finance's forecasts optimistic, as Bank Hapoalim estimated that the continuation of the war until the end of Passover could reduce growth to below 3%, and possibly much lower. Economist Jonathan Katz from "Leader Investments" also suggested that growth might not exceed 3.6% even if the war ends quickly.

According to the newspaper, and translated by Sada Economy, estimates of government revenues and the budget deficit ceiling recently approved were based on more optimistic forecasts, which means that new adjustments could raise the expected deficit level, although the latest update did not directly address the impact of slowed growth on tax revenues.

"Kalkalist" quoted the Chief Economist at the Ministry of Finance, Shmuel Abramson, stating that the relationship between growth and revenues has become more complex under exceptional circumstances, adding: "At this stage, it is impossible to determine the impact of growth updates on revenues, but we still uphold our current estimates."