Macroeconomic and geopolitical developments – Weekly report, October 24, 2025
The past week marked the near completion of the first phase of the Trump peace plan, including a fragile ceasefire, the return of all surviving hostages and the bodies of about 15 of the 28 killed, large-scale humanitarian aid to Gaza, and a partial Israeli withdrawal to the “yellow line.” U.S. and Arab mediators are already preparing the next stage, which envisions an interim international administration in Gaza, although renewed clashes in Rafah highlight how fragile the arrangement remains. Domestically, attention has shifted to the 2026 budget and the conscription law, with Prime Minister Netanyahu insisting the government will complete its term, although the political system remains fluid and early elections cannot be ruled out. Economically, the recovery remains slow, and cumulative data for the third quarter point to a moderation across most indicators following the sharp rebound in July. We project GDP growth of around 2.5% in 2025 and 3.3% in 2026. Our 2026 forecast is more cautious than other projections, notably the Bank of Israel’s 4.7%, as we expect continued weakness in high-tech, construction, and household demand. Inflation fell to 2.5% in September and is expected to decline further toward 2% by early 2026, paving the way for gradual rate cuts starting in November, or at the latest in January 2026 if the first move is delayed. Israel’s fiscal position remains stable, with the 2025 deficit likely to close near 5% of GDP, while markets continue to show confidence through lower bond yields, a stronger shekel, and a decline in Israel’s CDS premium to levels nearing those seen before the war. Next week will bring a series of key indicators that will help clarify Israel’s third-quarter performance, including consumer confidence, labor-market data, and the Bank of Israel’s activity index for September—all providing important signals ahead of the GDP release in mid-November.
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