Macroeconomic and geopolitical developments, forecast update – Weekly report, November 3, 2025
Israel enters November in a fragile but stabilizing environment. While the ceasefire with Hamas remains largely intact, negotiations toward Phase II of the Gaza arrangement have stalled, leaving uncertainty in the near term over the Gaza front and future regional arrangements.
Economic data for August and September point to a partial recovery following the military operation against Iran, led by high-tech and defense manufacturing, but with limited spillover to traditional industries and private consumption. The Bank of Israel’s activity index rose 1.8% in September, but underlying growth remains modest around 0.2% per month after adjusting for short-term volatility. Credit-card data also indicate that household spending continues to rise but remains below pre-war levels, suggesting that domestic demand is normalizing only gradually. Labor-market indicators remain tight, with unemployment near 3% and record-high job vacancies, underscoring supply constraints.
Fiscal discussions for 2026 have begun, but the likelihood of operating under an “interim budget” is increasing, given political fragmentation, with the ultra-Orthodox parties outside the coalition and early elections likely. Any tax-cut initiative in 2026 would risk widening the deficit beyond 4% of GDP, well above the 3% threshold viewed as sustainable by rating agencies. Inflation eased to 2.5%, paving the way for a 25-bps rate cut in November, provided that the October CPI does not surprise to the upside and geopolitical conditions remain relatively stable. Another reduction is anticipated in early 2026, followed by at least one additional cut in the second half of the year. The real policy rate remains high and restrictive, providing justification for a gradual easing cycle.
In this report, we include an update of our macroeconomic, fiscal and monetary policy forecasts.
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