Israel’s economy is expected to weather the current war with only limited damage, though the conflict will likely increase the government deficit, according to an analysis released Friday by global banking giant JPMorgan.
The bank said economic activity is likely to take a short-term hit but that overall damage should be smaller than during the 12-day war in June 2025. Economists at the financial institution described the economy as resilient and capable of recovering quickly from war-related shocks.
However, the conflict is expected to carry fiscal costs. JPMorgan estimates the budget deficit in 2026 will rise to about 4.2% of gross domestic product, up from a prewar forecast of 3.8%, adding roughly 9 billion shekels ($2.4 billion) to the deficit.
The bank revised its growth outlook to reflect a temporary slowdown followed by a strong rebound. Growth in the first quarter of 2026 is now projected at 1% annualized, down sharply from a previous forecast of 5%, largely due to the disruption caused by fighting and restrictions on economic activity.
But the bank raised its forecast for the second quarter to 8.5% annualized, up from 4.5%, expecting a surge in activity once the most intense phase of the conflict subsides.
For the full year, JPMorgan slightly lowered its 2026 growth forecast from 4.8% to 4.5%, while raising its outlook for 2027 to 3.7% from 3.5%, suggesting some growth will be pushed into the following year.
The report said the current conflict is likely to have a smaller impact on growth than last year’s war for two main reasons. Iranian strikes are spread over a wider geographic area and therefore less concentrated, and the economy and defense system have adapted after experience from the previous conflict.
Energy markets are another factor shaping the outlook. The bank said inflation could rise slightly in the short term due to higher global oil prices but kept its forecast for the end of 2026 unchanged at 2.1%, the midpoint of the government’s inflation target range.
Israel is a major oil importer, meaning gasoline prices tend to follow global crude prices. JPMorgan estimated that a 30% rise in oil prices would increase fuel prices at gas stations by about 8%, adding roughly 0.2 percentage points to the consumer price index.
However, the report said Israel’s energy system provides a buffer against external shocks because of its domestic natural gas resources. About 70% of electricity production is based on natural gas from offshore fields, and domestic gas prices are regulated and largely insulated from global markets.
Even if major offshore gas fields temporarily halt exports, domestic supply can rely on other reservoirs, reserves or short-term use of coal-fired power plants, limiting the impact on electricity prices, the report said.
The conflict also complicates monetary policy decisions for the Bank of Israel. Slower economic activity would normally support interest-rate cuts, but higher energy prices could push inflation upward.
JPMorgan said the central bank is likely to take a more cautious approach, expecting no rate cut in March and projecting the next reduction in May. While the bank still expects total rate cuts of 75 basis points during the year, the risks now point toward fewer reductions due to uncertainty.
Overall, the report concluded that the conflict represents a temporary external shock rather than a deep economic crisis.
JPMorgan said the economy is likely to return to its previous growth path after a short period of volatility, supported by rapid recovery mechanisms, cautious monetary policy and energy independence in natural gas.
The bank added that the main uncertainties remain the length of the war and how long global energy prices remain elevated, which could influence inflation and economic performance.