The Bank of Israel’s Research Department published its October macroeconomic forecast, projecting growth in gross domestic product (GDP) excluding production abroad of 3.4% in 2026 and 5.1% in 2027. This measure underpins its assessment of domestic activity because overseas production by Israeli companies, largely owned by foreign shareholders, raises measured GDP without a corresponding expansion in domestic productive capacity or income. Inflation is projected at 2.0% over the four quarters ending in the third quarter of 2027, with the policy interest rate averaging 3.0% that quarter. The baseline assumes fighting remains at its current low intensity and geopolitical tensions persist. Headline GDP growth is forecast at 5.6% in 2026 and 7.5% in 2027, including the contribution from production abroad. Domestic activity is expected to approach its prewar trend as employment recovers and labor shortages ease, but remain below that trend through the end of 2027 because labor force participation recovers slowly. The 2026 inflation forecast was lowered by 0.3 percentage points from July to 1.5%, reflecting recent price readings, revised component forecasts and a reduction in fuel excise. The 2027 forecast was raised by 0.3 percentage points to 2.1%, reflecting higher oil prices, shekel depreciation and the expected reversal of the excise reduction. The budget deficit is projected at 4.4% of GDP in 2026 and 4.6% in 2027. Higher expected revenue lowered the 2026 deficit forecast, while increased defense spending raised the 2027 projection. Public debt is forecast at 68.0% of headline GDP in 2026 and 66.5% in 2027, but at 70.0% and 70.5%, respectively, when production abroad is excluded. The forecast highlights uncertainty over the undetermined 2027 defense budget and tax receipts from overseas production. Renewed intensive fighting could worsen labor constraints and inflation, requiring a more restrictive interest rate path. Potential economic effects of the upcoming Israeli elections are excluded from the baseline.
Bank of Israel forecasts growth excluding production abroad of 3.4% in 2026 and 5.1% in 2027
The Bank of Israel’s Research Department projects GDP growth excluding production abroad of 3.4% in 2026 and 5.1% in 2027, with domestic activity remaining below its prewar trend through 2027. Inflation is forecast at 2.0% over the four quarters ending in the third quarter of 2027, when the policy rate is expected to average 3.0%. The baseline assumes continued low intensity fighting, with renewed conflict and uncertainty over defense spending and tax revenue posing risks.