Macroeconomic and geopolitical developments – Weekly report, November 12, 2025
Geopolitical tensions intensified along Israel’s northern border following massive military strikes against Hezbollah, while Phase-Two ceasefire talks in Gaza show little progress meanwhile. Domestically, the recent leak of classified investigation materials, which led to the dismissal of the Military Advocate General, deepened institutional friction. On the economic front, following the cease-fire in Gaza, confidence across Israel’s economy improved markedly in October. Business sentiment strengthened across most sectors, while consumer confidence surged to its highest point since late 2022. Economic indicators for the post-Iran war and pre-ceasefire period (to October) point to moderate growth, driven mainly by strong expansion in high-tech and defense manufacturing, alongside only mild increases in private consumption. The upcoming Q3 GDP release (Nov. 16) is expected to show a sharp rebound, reflecting a technical correction after the shutdown during the Iran operation rather than sustained growth momentum.
The discussions on the 2026 state budget have accelerated, with a deficit target of 3.2% of GDP and plans to cut income taxes offset by politically sensitive revenue measures. However, the official target appears overly optimistic, assuming strong growth and high tax revenues despite spending pressures. Israel is expected to enter 2026 under a continuing budget, limiting monthly spending to one-twelfth of 2025 allocations at least until March. This framework is unlikely to be restrictive in the first quarter, but if the budget is not approved by then, early elections will be triggered and the government may operate under a continuing framework for most of 2026, a scenario that could prove more problematic.
Israel’s October CPI will be released on Friday, and we expect a 0.6% increase, slightly above the market consensus of 0.5%. Nevertheless, we expect the Bank of Israel to begin its rate-cutting cycle at the November 24 policy meeting, supported by easing annual inflation (expected around 2.6%), receding geopolitical risks, a real policy rate that remains restrictive, above 2%, and the global move toward monetary easing.
The GDP data to be released on November 16, together with the CPI figures on November 14, will provide a clearer picture of underlying inflation and growth trends ahead of the Bank of Israel’s interest rate decision.
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