Israel’s economy picks up for the first time since war began

JERUSALEM – Israel’s economy accelerated in 2025,

after two years of war

slammed the brakes on the country’s previously robust activity. 

Gross domestic product expanded by 3.1 per cent in 2025, Israel’s bureau of statistics said on Feb 16, above projections from both the Finance Ministry and the central bank for 2.8 per cent growth.

GDP per capita is now similar to levels seen before the start of the conflict in Gaza.

The economy slowed after October 2023, when an attack by Iran-backed Hamas unleashed a two-year war that broadened to clashes between Israel and Iran, as well as other militant groups allied with the Islamic Republic.

The economic consequences – including increased military spending, reservist call-ups and business interruptions – led to a deceleration the following year. 

In 2024, the economy advanced 1 per cent, its weakest pace in over two decades outside the Covid-19 pandemic.

The data is likely to solidify the government’s expectations that the country is on track to recover from two years of lackluster activity, although it has yet to return to levels before the war. Israel’s central bank projects growth will reach 5.2 per cent in 2026.

Israel’s Finance Minister Bezalel Smotrich reiterated calls on the central bank to lower interest rates to help reduce mortgage payments and the cost of credit to small businesses. 

“The figures speak for themselves,” Mr Smotrich said in a statement. “Inflation is being curbed, the economy is stabilising. This is the time to ease the burden on households.” 

The Israeli economy still faces downside risks which, if realised, may stifle growth.

The war in Gaza is yet to come to a permanent end and negotiations between the US and Iran are not guaranteed to prevent US President Donald Trump’s administration from making good on a threat to strike the country. 

Mr Trump has repeatedly warned Iran

it will face military action

if an agreement is not reached on its nuclear programme, and has been building up forces in the Middle East. Israel would likely get caught in the line of fire or join a US attack, likely drawing Iranian retaliation that could cost lives and set back the economy’s rebound. 

The US and Iran are set to meet in Switzerland on Feb 17 for a second round of indirect talks. 

The economic expansion in 2025 was driven by an 8.1 per cent rise in gross fixed capital formation and a 6.1 per cent rise in exports. Public expenditure, unusually high during the war, expanded 1.7 per cent.  

Data showed fourth quarter activity grew by an annualised, seasonally adjusted 4 per cent compared with the third quarter. That is slightly lower than the median estimate of 4.1 per cent in a Bloomberg survey of 12 economists.

“The breakdown shows that growth in the fourth quarter was driven by a large rebound in exports,” emerging Europe economist at Capital Economics Nicholas Farr said. Meanwhile, he noted, “domestic demand was quite weak”.

The third quarter in 2025 saw a particularly strong expansion, with the economy recovering from the impact of a military confrontation with Iran which forced many businesses to completely shut down.

Growth was revised to show GDP was up 12.7 per cent between July and September, compared with a contraction in the period prior. BLOOMBERG