Israel's war bill lands as the shekel hits a 30-year high
Q1 GDP shrank 3.3% from the Iran war, but the ceasefire sends the currency to a 1993 peak and ratings outlooks to stable — even as Smotrich fights a record defence budget
Summary
Israel's economy contracted 3.3% annualised in Q1 2026 under the Iran war, with consumer spending down 4.7% and exports down 3.7%. The Bank of Israel cut its 2026 growth forecast to 3.8% from 5.2% and lowered the policy rate to 3.75%; inflation sits at 1.9%. Finance Minister Bezalel Smotrich is battling a record defence bill — a 2026 defence budget around NIS 112bn ($34bn) inside a cumulative two-year war cost he puts near NIS 250bn ($77bn) — while the Knesset raised the deficit ceiling toward ~5% of GDP. Yet the ceasefire produced a sharp rebound: the shekel reached a roughly 30-year high near 3.06 to the dollar, the TASE recovered, and Moody's and S&P moved their outlooks to stable. The rally and the bill arrive together, the second waiting behind the first.
By the numbers
- −3.3% — Q1 2026 GDP, annualised (consumption −4.7%, exports −3.7%).
- 3.8% — Bank of Israel's cut 2026 growth forecast (from 5.2%); rate 3.75%.
NIS 250bn ($77bn) — Smotrich's cumulative two-year war-cost figure.- ~3.06/$ — shekel at a roughly 30-year high; ~20% appreciation.
- stable — Moody's (Baa1) and S&P (A) outlooks after the ceasefire.
Why it matters
Benjamin Netanyahu heads into an autumn vote with a contradiction: financial markets price a peace dividend while the budget books a record defence bill and a wider deficit. The currency strength flatters the recovery; the tax and spending reckoning Smotrich is fighting lands later, exposing whoever holds the finance ministry after the election.
What to watch
- Passage of the 2026 budget and the final deficit ceiling.
- Whether the shekel's strength holds or reverses on any ceasefire wobble.
- Reconstruction costs in the north and south feeding the deficit.
- Any follow-through ratings action from S&P or Fitch.