Macroeconomic and geopolitical developments – Weekly report, February 18, 2026

ISRAEL - Report 18 Feb 2026 by Sani Ziv

Israel’s economy continues the transition from a war economy to a more post-war period with a moderate growth phase. While activity remains expansionary, momentum is easing, and growth is increasingly export-led, with domestic demand still relatively weak. Geopolitical developments remain a key source of risk. Diplomatic contacts between the United States and Iran are becoming increasingly fragile, raising the risk of a potential U.S. strike on Iran and a broader regional escalation. Although the economy has so far demonstrated resilience, the 2026 outlook has become highly sensitive to the risk of escalation.

Inflation declined to 1.8% in January, falling below the midpoint of the Bank of Israel’s target range. The disinflation process is being supported by the shekel’s appreciation, lower global energy prices, and favorable base effects. Market-based inflation expectations have also moderated, strengthening the case for monetary easing. However, despite improving macro conditions, the Bank of Israel is likely to proceed cautiously in view of the geopolitical risk. On the real side of the economy, Q4 GDP grew by 4% (annualized), driven primarily by a sharp surge in exports (+33%), while private consumption and investment remained weak. Although annual growth for 2025 reached 3.1%, GDP remains below its estimated potential path, suggesting a still-open output gap.

Looking ahead, the macro picture is becoming clearer: inflation is contained, growth continues, and financial conditions remain relatively tight compared to the inflation environment. The direction of monetary policy appears clear, with the key question being timing rather than trajectory. However, geopolitical developments will remain the primary risk factor for markets and for the 2026 growth outlook.

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