IMF Raises Israel's Growth Forecast to 4.5%, Highest in OECD

The International Monetary Fund (IMF) has significantly upgraded its growth forecast for Israel for 2026, projecting a 4.5% expansion of the Israeli economy. This revised forecast, released this week, is an increase from the previous estimate of 3.5% and positions Israel with the highest projected growth rate among OECD countries. Denmark is expected to grow at 3.7%, South Korea at 3.3%, and Poland at a lower rate.

The upward revision comes just months after the IMF's annual report on Israel estimated growth at 3.5%. At that time, the Fund anticipated economic strengthening as the labor supply improved, reserve duty mobilization decreased, and economic activity gradually returned to normal. The new forecast indicates that the recovery in 2026 is progressing faster than the IMF anticipated mid-year.

While growth is robust, public debt remains a concern. The strong growth follows several years where the war impacted labor supply, investments, construction, and business activity, with a portion of the expected rise reflecting a return of previously affected activities. On the fiscal front, the latest data from the Ministry of Finance shows a deficit of 3.2% of GDP for the 12 months ending in September, below the government's 2026 target. The Bank of Israel has also noted that the deficit has remained below target, partly due to high tax collection and more moderate civilian spending.

However, public debt remains elevated compared to pre-war levels. The IMF estimated in July that the debt-to-GDP ratio would be 70.1% in 2026 and 70.7% in 2027. Such levels reduce the government's fiscal flexibility in the event of additional defense spending, an economic slowdown, or a decline in tax revenues.

This situation is compounded by a warning from Fitch Ratings. The agency maintained Israel's credit rating at 'A' with a negative outlook, cautioning about a further rise in the debt-to-GDP ratio in the coming years. Fitch forecasts the debt could reach approximately 70.3% of GDP this year, 71.7% in 2027, and around 72.1% in 2028.

Fitch's warning gains significance as Israel approaches elections in two weeks. The agency pointed to the possibility of an inconclusive election result, potentially leading to a prolonged period of a caretaker government or even new elections. Such a scenario could delay crucial budgetary decisions, deficit reduction measures, and reforms aimed at stabilizing debt.

The divergence in forecasts highlights the dual nature of Israel's current economy. On one hand, there is high growth, a strong labor market, tech investments, and tax revenues supporting the budget. On the other hand, there is higher debt, significant defense expenditures, and political uncertainty that could affect the next government's ability to implement fiscal measures. The IMF also continues to identify the security environment as a key factor in its forecast, noting that renewed significant conflicts could harm growth, increase government spending, and strain the labor supply. Additionally, the Israeli economy remains heavily reliant on the high-tech sector, meaning sharp changes in global investments in technology and artificial intelligence could impact exports, investments, and the shekel.