IMF sees moderate Israeli rebound, but lowers growth forecast after war escalation
2027 projections diverge sharply as global lender signals slower long-term recovery.
The International Monetary Fund has lowered its growth forecast for the Israeli economy following the war, from 3.9% to 3.5%. It is worth noting that the the Central Bureau of Statistics confirmed on Thursday that the Israeli economy grew by 2.9% in 2025.
The Fund’s forecast in its semi-annual report broadly aligns with the updated projection of the Ministry of Finance, which assumes a scenario in which the war with Iran ends in mid-April (i.e., in the coming days) and the conflict in Lebanon with Hezbollah concludes by the end of the second quarter (late June). On the other hand, the IMF’s outlook is more pessimistic than that of the Bank of Israel, which forecasts growth of 3.8% (last updated at the end of March).
This means that the Fund expects a recovery in economic activity this year compared to 2025, but one that is more moderate than previously anticipated before the escalation in the conflict with Iran. An important divergence appears in the forecast for 2027, where gaps between international and Israeli institutions widen significantly, reflecting differing macroeconomic assumptions. While both the Bank of Israel and the Ministry of Finance expect growth of 5.5% in 2027, the IMF projects a more modest 4.4%, a gap of 1.1 percentage points. In other words, from Washington, Israel’s recovery appears less robust than it does from Jerusalem.
The positive news is that, unlike its growth forecasts, the IMF has made only minor adjustments to its inflation and unemployment projections. Inflation in 2026 is expected to remain within the government’s target range at around 2.3%, at the upper end, compared to a previous forecast of 2.2% last October. This is notable given that current inflation risks, driven by potential disruptions such as restrictions in the Strait of Hormuz and broader supply chain pressures in energy and food markets (particularly fertilizers), are considered more severe than growth risks.
For 2027, the Fund expects inflation to ease further toward the midpoint of the target range, at 2.1%. The unemployment forecast remains unchanged at 3.2% for 2026, with a slight increase to 3.3% in 2027.
The IMF’s downward revision to Israel’s growth forecast is also slightly larger than its adjustment to global growth, which was reduced from 3.4% to 3.1%. The Fund presents three alternative scenarios reflecting geopolitical uncertainty, as the report is published at a particularly sensitive time, with negotiations between the United States and Iran still highly uncertain.
The tone of the IMF’s latest World Economic Outlook is notably cautious. The headline reads: “War darkens global economic outlook and reshapes policy priorities.” The Fund’s chief economist, Dr. Pierre-Olivier Gourinchas, noted that over the past year, pressures from rising trade barriers and elevated uncertainty have been partially offset by tailwinds from technology-driven investment, easing financial conditions (including interest rate cuts and a weaker US dollar), and supportive fiscal and monetary policies. However, the Middle East conflict now represents a significant counterforce, affecting commodity markets, inflation expectations, and financial conditions.
According to the report, prior to the outbreak of conflict, the global economy had shown unexpected resilience, with growth projected at 3.4% for 2026. This was driven by private-sector flexibility, improved financial conditions following monetary easing, and technological advances led by artificial intelligence. However, the IMF now argues that the conflict has sharply disrupted this momentum, particularly through the closure of the Strait of Hormuz and damage to critical energy infrastructure in the region, a key hub for global fuel supply.
The Fund outlines three scenarios. In the baseline scenario of a short-lived conflict, with disruptions to production and trade easing by mid-2026, global growth falls to 3.1% and inflation rises to 4.4%. In a downside scenario in which the Strait of Hormuz remains closed for an extended period, energy prices rise sharply, with oil up by as much as 80% compared to previous forecasts. Rising inflation expectations then trigger interest rate hikes, pushing global growth down to around 2.5%.
In an even more severe scenario involving prolonged supply disruptions into 2027, the IMF warns of significant damage to oil production and refining capacity in the Middle East. In this case, oil prices double relative to pre-war levels and gas prices triple. Inflation expectations become unanchored, forcing aggressive monetary tightening, with global growth falling to just 2% and inflation exceeding 6%.
Beyond the headline figures, the report details how the shock transmits through the global economy. The first channel is rising energy prices, particularly oil and gas, which act as a negative supply shock, increasing inflation while reducing real incomes. The second is the risk of a wage-price spiral, as workers and firms attempt to offset rising costs. The third is heightened uncertainty, which tightens financial conditions and triggers repricing in global markets.
The IMF stresses that the impact will not be evenly distributed. Energy-importing countries and low-income economies are expected to be most vulnerable. Some energy-exporting Gulf states are also affected due to infrastructure damage, export constraints, and reduced tourism and business activity. Countries dependent on remittances from workers in the Middle East are also likely to experience revenue declines.
On policy, the IMF reiterates its standard recommendations for dealing with supply-driven shocks. On the monetary side, central banks are advised to treat price increases as temporary, provided inflation expectations remain anchored. However, they must be prepared to tighten policy rapidly if expectations become unanchored and inflation becomes entrenched.
On the fiscal side, governments are urged to avoid broad-based subsidies and price controls. Instead, they should focus on targeted, temporary support for vulnerable households and firms. The Fund warns that interfering with price signals can be counterproductive: high prices reflect scarcity and encourage both demand restraint and increased supply, while controls and restrictions risk creating shortages and spillovers across borders.
