The Organisation for Economic Co-operation and Development (OECD) on Wednesday released an updated forecast for Israel's economy, revising its growth and fiscal projections in light of the country's evolving security and geopolitical challenges.
The OECD projects Israel's economy will expand by 3.3% in 2026, reflecting the impact of the conflict with Iran and broader instability across the Middle East. Growth is expected to accelerate significantly to 5.6% in 2027, nearly double the rate forecast for the global economy.
Prior to Operation Roaring Lion, Israel's economy had been showing strong momentum, driven largely by private-sector activity. Industrial production grew at an annualized rate of 11% during the three months ending in January 2026, while credit card purchases increased by 9.2% in February. Unemployment also fell to 2.6% during the same month.
That positive trend was disrupted by hostilities involving Iran and Hezbollah. School closures, the mobilization of reservists, and a sharp decline in consumer confidence during March and April weighed on economic activity. The OECD's 2026 growth forecast is approximately half a percentage point lower than the projection issued by the Bank of Israel in late March, although both institutions expect similar growth levels in 2027.
OECD economists said Israel's recovery is expected to be supported by a rapid rebound in the construction sector, which resumed operations in mid-March. Reconstruction efforts following rocket attacks, combined with strong underlying housing demand, are expected to boost activity. Private consumption, which temporarily contracted during the conflict, is forecast to rise by 6.8% in 2027. Service exports are expected to recover more gradually due to their reliance on the return of international air travel.
The report notes that risks to the outlook remain significant in both directions. A renewed high-intensity conflict or a sharp decline in global artificial intelligence-related market valuations could weaken economic performance. Conversely, greater regional integration and expanded trade agreements could generate stronger-than-expected growth.
On the fiscal front, the OECD highlighted the challenges posed by continued security expenditures. Military operations in 2026 are expected to impose substantial budgetary costs, delaying efforts to reduce both the budget deficit and public debt.
The organization forecasts Israel's budget deficit will widen to 5.3% of GDP this year before narrowing to 4.2% in 2027, aided by fiscal measures included in the 2025 state budget, such as a VAT increase and changes to income taxation. As a result, Israel's debt-to-GDP ratio is expected to rise to 71% in 2026 before edging down to 70% in 2027, compared with roughly 60% in 2022.
Despite these fiscal pressures, the OECD expressed confidence in Israel's monetary stability. Inflation stood at 1.9% on an annual basis in April 2026, supported in part by domestic natural gas production that has shielded the economy from energy-price shocks affecting many importing countries.
The organization expects inflation to remain under control, forecasting rates of 2.3% in 2026 and 2.1% in 2027.
The report also pointed to resilient financial markets, noting that prudent monetary policy and recent tax measures have helped preserve financial stability. Israel's stock market has reached record highs, while the shekel has strengthened since April 2025. The OECD expects these conditions will allow the Bank of Israel to lower interest rates to 3.5% over the coming year.