Israel’s economy is expected to grow by just 3.3% this year against the backdrop of the war with Iran and broader geopolitical shocks across the Middle East, but is projected to recover “strongly” after the sharp contraction caused by military operations in March and April 2026, according to the OECD’s latest World Economic Outlook, published Wednesday.
The OECD forecast puts Israel’s expected growth for 2027 at 5.6%, nearly double the projected rate for the global economy. Before the latest shock, the report said, Israel had been showing signs of accelerating growth led by the private sector: industrial production expanded at an annual pace of 11% in the three months to January 2026, credit card purchases rose 9.2% in February, and unemployment fell from 3.2% in December 2025 to 2.6% in February.
The wars with Iran and in Lebanon interrupted that momentum. Schools were closed, workers shifted from civilian jobs to reserve duty, and consumer sentiment plunged in March and remained weak in April. The OECD’s forecast for Israel this year is about half a percentage point lower than the Bank of Israel’s forecast issued at the end of March, though the central bank is expected to update its projection in the coming month. For 2027, the OECD’s forecast is almost identical to that of the Bank of Israel.
According to the report, Israel’s recovery will be driven in part by the construction sector, which returned to activity in mid-March and is expected to expand faster than before the wars, both to repair missile damage and to meet pent-up demand for housing amid population growth.
Private consumption, which temporarily contracted, is expected to jump by 6.8% in 2027. Services exports are projected to recover more slowly because they depend on the resumption of international flights, which the report says is proceeding gradually. Overall, the OECD’s outlook for next year is highly optimistic.
Still, the report stresses that the risks to the forecast are “symmetric and significant.” On the downside, renewed high-intensity fighting would weaken economic activity and deepen the deficit, while a global collapse in the valuation of AI companies could threaten Israel’s tech sector. On the upside, regional integration, including trade agreements with neighboring countries, could generate “significantly stronger growth.” In other words, the gap between the scenarios depends not only on macroeconomic conditions, but also on geopolitics, where the report identifies the main source of uncertainty.
The central issue in the OECD’s chapter on Israel is fiscal policy. According to the organization’s economists, renewed military activity in 2026 has created large budgetary costs that are delaying fiscal consolidation.
As a result, the government deficit is expected to widen to 5.3% of GDP in 2026 before narrowing to 4.2% in 2027, assuming defense spending declines and tax revenues remain strong, partly due to consolidation measures adopted in previous budgets. Those measures include the government’s 2025 package, such as the VAT increase and income tax changes.
The OECD projects Israel’s debt-to-GDP ratio will rise to 71% this year before edging down to 70% in 2027, compared with about 60% in 2022.
The organization’s main recommendation is that Israel rebuild the fiscal buffers that helped it in the past. That would require a faster reduction in debt by maintaining revenue measures and cutting defense spending when security conditions allow, while preserving room for growth-enhancing investment in education and infrastructure.
On monetary policy, the report notes that even at the height of the shock, inflation in Israel remained stable, at an annual rate of 1.9% in April 2026. One reason is that Israeli electricity prices are largely insulated from global natural gas prices because local production is priced through long-term contracts. The OECD said that energy independence shields Israel’s economy from much of the shock hitting energy-importing countries.
The OECD expects inflation to continue declining, to 2.3% this year and 2.1% in 2027, as fuel prices moderate and civilian labor shortages ease. The report says stable monetary management and the 2025 tax package helped preserve currency and financial stability despite a series of major shocks since October 2023.
That stability was reflected in Israel’s CDS levels, a measure of risk premiums based on insurance against sovereign bond default, which rose by 20 basis points in late February and early March but returned in April to January levels. The report also notes that the local stock exchange is at a historic high and that the shekel has strengthened since April 2025.
After last month’s 25-basis-point interest rate cut, the OECD expects that as supply constraints ease, especially reserve-duty pressure on the labor market, the Bank of Israel will be able to lower the interest rate to 3.5% during next year.
Globally, the dominant force shaping the OECD outlook is also the conflict in the Middle East. The organization says the world economy entered 2026 stronger than expected, supported by major AI investment, favorable financial conditions and easing trade tensions, but the war caused disruptions to shipping through the Strait of Hormuz and damage to energy infrastructure, driving up energy and fertilizer prices and reversing the earlier improvement.
The numbers illustrate the scale of the disruption. Global oil supply fell by 13.5% between February and April 2026, while output from Gulf states dropped by 45% in April. LNG exports from the region, mainly from Qatar, stopped, and global gas supply is expected to be about 15% lower than previously forecast.
Against that backdrop, the OECD cut its global growth forecast from 3.4% in 2025 to 2.8% in 2026, before a recovery to 3.1% in 2027. That means the global growth forecast for this year is significantly lower than Israel’s.
Because of the high uncertainty, the current forecast is built around split scenarios. The baseline scenario, described as a “time-limited disruption,” assumes a diplomatic arrangement that calms the region. The alternative, a “prolonged disruption,” assumes the current situation continues deep into 2027, with global energy supply 10% below its pre-conflict level and exports from Middle Eastern countries down 40%.
The difference is dramatic. Under the prolonged disruption scenario, global growth falls to 2.1% in 2026 and 1.8% in 2027, a pace the OECD says is usually seen only during major global recessions, such as the 2008 financial crisis or the COVID-19 crisis in 2020.