Macroeconomic and geopolitical developments – Weekly report, December 22, 2025
Data released over the past week support the view that Israel’s economy is transitioning to a more stable growth phase, with activity expanding at an above-trend pace. Inflation surprised to the downside, easing to 2.4% in November, with underlying measures such as services inflation pointing to a slowdown in price pressures and strengthening the case for continued monetary easing in early 2026.
The labor market remains tight, with low unemployment rates and elevated vacancy rates, particularly in services. This environment is likely to sustain wage pressures and supports only a gradual pace of rate cuts. External accounts surprised to the downside in Q3, with a temporary current account deficit recorded for the first time in over a decade. However, the deterioration was driven mainly by investment income outflows, while the balance of goods and services remained in surplus. In addition, Israel’s net international investment position further improved in Q3, supported by strong foreign-asset gains and renewed capital inflows.
Economic momentum remains resilient, as reflected in the Bank of Israel’s composite activity index, while the housing market continues to weaken. Declining sales, elevated inventories, and rising completions are adding downward pressure on home prices. At the same time, major gas and defense export deals announced last week strengthen the medium-term growth and fiscal outlook and support the shekel, which continues to benefit from solid fundamentals, capital inflows, and favorable interest-rate differentials.
On the geopolitical and domestic political fronts, uncertainty remains high. The U.S. is advancing the next phase of the 21-point Gaza plan, with Prime Minister Netanyahu’s upcoming visit to Washington seen as a critical juncture for the process. At the same time, tensions with Iran have increased, after Israel identified renewed Iranian efforts to rebuild missile capabilities. This raises the risk of further escalation looking into 2026. Domestically, political tensions are intensifying ahead of the elections amid disputes over an independent commission of inquiry into October 7th attack.
Looking ahead to this week, the economic calendar is relatively light. The focus will be on foreign-trade data by country, a detailed Labor Force Survey, and services exports for October, which will be closely watched as an indicator of high-tech activity with implications for the current account and exchange-rate dynamics. The Bank of Israel is also expected to publish updated inflation-expectations measures. Overall, with no major headline releases scheduled, markets are likely to remain sensitive to geopolitical developments and global financial conditions.
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