In its latest Economic Outlook released today, the OECD updates its growth and fiscal deficit forecasts for Israel in the wake of the war with Iran and geopolitical shocks. It says that "following the sharp contraction caused by the March-April 2026 military operations, the economy will rebound strongly," but projects just 3.3% economic growth this year, with the rebound coming next year, when it expects growth of 5.6%. The OECD sees the country’s fiscal deficit reaching 5.3% of GDP, higher than the government’s target of 4.9% and despite the positive figures reported for the first few months of the year. In 2027, the deficit is expected to narrow to 4.2% of GDP, "as defence spending declines and revenues remain solid."

The organization expects inflation in Israel to be 2.3% in 2026 (within the Bank of Israel’s 1-3% target range), falling to 2.1% in 2027 "as fuel prices abate and labour supply normalises." Its report states, however, "Risks are substantial on both sides: renewed high?intensity warfare would weaken activity and worsen public finances, while deeper regional trade integration could deliver significantly stronger growth."

The OECD says that if inflation and the fiscal deficit do continue to fall and tax revenues remain strong, the Bank of Israel will have room for further interest rate cuts, "once security?related labour constraints abate", that is, once reservists are demobilized. In fiscal policy, the organization calls on Israel to "rebuild buffers by sustaining revenue measures, reducing defence outlays when feasible, while preserving room for growth?enhancing investment in education and infrastructure."

The OECD points out that Israel’s risk premium rose by twenty basis points in February-March, that the local stock market has reached historical peaks, and that the shekel has been strengthening since April 2025. It estimates that with improvement on the supply side and a fall in fuel prices, together with the cumulative effect of the strong shekel, the Bank of Israel will be able to reduce its interest rate to 3.5% next year.

The war with Iran broke out during a period of rapid economic growth led by the private sector. Industrial production expanded at an annualized rate of 11% in the three months to the end of January. Credit card purchases rose by 9.2% in February in comparison with February 2025, while the unemployment and inflation rates fell. The war, however, caused sharp contraction of the private sector, The organization also points out that the impact on inflation was moderate in Israel relative to the rest of the world since electricity prices were almost unaffected by global prices thanks to local production of natural gas.

As mentioned, the OECD recommends that Israel should restore fiscal buffers. Governor of the Bank of Israel Amir Yaron also commented on the fiscal situation this week, pointing out that Israel’s debt:GDP ratio has risen to 70%. The OECD calls for reducing government debt by maintaining steps taken to increase state revenues while reducing defense spending. At the same time it also calls for maintaining room in the state budget for spending required on education and infrastructure, and for simplification of regulation.

Published by Globes, Israel business news - en.globes.co.il - on June 3, 2026.

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