IMF Cuts Israel's Economic Projection to 3.5 Percent

The International Monetary Fund (IMF) building in Washington DC, United States. The IMF has cut its forecast for Israel's economic growth in 2026 to 3.5 percent amid geopolitical tensions in the region. Photo: Britannica.

JAKARTA - The International Monetary Fund or IMF has cut its forecast for Israel's economic growth in 2026. Regional tensions and the burden of defense spending have weakened the country's economic prospects from previous estimates.

Arab News, quoted Thursday, July 2, reported that the IMF lowered its estimate of Israel's economic growth in 2026 to 3.5 percent from the previous projection of 4.8 percent. The IMF said that tensions in the region were the main factor overshadowing the Israeli economy.

"High regional tensions cast a shadow over Israel's economy," the IMF said, referring to conflicts with Iran, Hezbollah, and Hamas.

The IMF also expects Israeli inflation to rise temporarily due to higher energy prices and supply constraints. This condition occurs even though the shekel strengthened to its highest level against the US dollar in more than three decades.

According to the IMF, the Israeli economy has continued to show resilience after being hit several times. However, high geopolitical uncertainty and long-standing structural impediments are expected to weigh on growth prospects.

"In addition, the renewed escalation of regional tensions remains the main downside risk," the IMF said.

The IMF assessed that Israel needed to implement careful policies to maintain macroeconomic stability. The institution also encouraged structural reforms so that the potential for economic growth could be increased.

Previously, after the economy grew 2.9 percent in 2025, the war with Iran in March and April caused the Bank of Israel to cut its 2026 growth projection to 3.8 percent. The Israeli Finance Ministry estimates growth could reach up to 4 percent this year.

Israel's own economy shrank 3.8 percent year-on-year in the first quarter.

For 2027, the IMF projects the Israeli economy to grow 4.4 percent. Inflation is expected to remain near 2 percent in 2026 and 2027. The projections are based on data through June 10.

The IMF also recommends that the Israeli government rebuild its fiscal space, that is, the state's budgetary ability to bear essential needs without disrupting economic stability. One way is to increase state revenues and carry out fiscal consolidation. This recommendation arises because defense spending rises to finance military conflicts.

On the monetary side, the IMF assessed that policies needed to remain tight enough because higher energy prices could potentially drive inflation.

In recent weeks, a truce between the United States and Iran has also weighed on oil prices.

The IMF asked the Bank of Israel to continue monitoring the impact of the war on the labor supply, rising energy prices, exchange rate movements, as well as the effect of the latest interest rate cuts on financial conditions and domestic demand.

Policymakers are also asked to be ready to change the direction of policy if the latest data or increased risks trigger price pressures again.