Israel’s Q1 2026 GDP declined by 3.3% annualized, reflecting a temporary war shock; output gap remains significant

ISRAEL - In Brief 18 May 2026 by Sani Ziv

---

Israel’s preliminary GDP estimate for the first quarter of 2026, published on Sunday, showed a contraction of 3.3% at an annualized rate, equivalent to roughly NIS 3.7 billion in lost output. The decline mainly reflected the sharp slowdown in economic activity during March, particularly its first week, when large parts of the economy were effectively shut down due to the war with Iran. Overall, the contraction was relatively moderate. During Operation Rising Lion in June 2025, the estimated loss in GDP reached approximately NIS 4.7 billion during only twelve days of fighting. However, from a longer-term perspective, the more significant issue is the widening gap between actual GDP and the economy’s estimated potential output path. In the first quarter of 2026, the level of GDP was approximately 6% below its estimated potential level—defined as the output level that would have prevailed had the economy continued to grow along its pre-war long-term trend (3.5% annual) from the third quarter of 2023. The chart below compares actual GDP with its estimated potential path. Following the fighting with Iran during the first quarter of 2026, the level of economic activity remains significantly below the economy’s long-term growth trajectory. GRAPH 1Actual GDP versus estimated potential GDP,  2021-2026,Constant prices Source: Israel Central Bureau of Statistics (CBS).On the demand side, the first quarter was characterized by a 4.7% decline in private consumption at an annualized rate and a sharp contraction in residential construction activity, likely reflecting the temporary shutdown of construction sites during the war period. public consumption fell by 4.8% (against the backg...