Israel’s economy contracted in the April to June quarter, with gross domestic product shrinking 3.5 percent as the war with Iran led to a shutdown of many businesses and hurt consumer spending, exports, and investment, according to a preliminary estimate by the Central Bureau of Statistics.
The decline marks the first three-month tumble since the last quarter of 2023, when the economy plunged 20.8%, as the outbreak of war with the Hamas terror group took a heavy toll on consumer spending, trade, and investment.
Israel launched a surprise campaign against Iran on June 13, saying it was acting against an imminent existential threat from the regime’s nuclear and ballistic missile programs. The 12-day war, which ended with a ceasefire that month, has dented the economy and disrupted key industries, all the while the country’s airspace largely remained closed, and thousands of workers were called into military reserve duty, affecting individuals and businesses.
Barrages of ballistic missiles sent citizens dashing in and out of bomb shelters, damaging hundreds of buildings, and leading to a complete or partial shutdown of local business and commerce during the period.
Ronen Menahem, chief markets strategist at Mizrahi Tefahot Bank, said that the preliminary economic data reflects the repercussions of the Iran war on both business activity and consumer spending.
Sign up for the Tech Israel Daily
and never miss Israel’s top tech stories
By signing up, you agree to the terms
Much of the slide in GDP growth in the April to June period stemmed from a drop in business sector output, which plunged 6.2%, the statistics bureau said. Consumer spending fell 4.1%, and exports of goods and services, excluding startups and diamonds, decreased by 3.5%. Government spending fell by 1%.
Residents look a damaged apartment after a series of Israeli strikes in Tehran, Iran, June 13, 2025 (AP Photo/ Vahid Salemi)
“The 12 days of war with Iran had an impact on household spending, while the high interest rate and the appreciation of the shekel have also challenged the economy,” said Menahem. “It will take at least one or two quarters to ‘clean up’ the impact of the Iran war from the trend data.”
Menahem noted that the component most sensitive to security tensions, investments in fixed assets — mostly in residential buildings — recorded the sharpest hit with a 12.3% drop.
Last year, the economy grew by around 1%, down from 1.8% in 2023 and 6.3% in 2022, before the hostilities.
Over the past 22 months, Israel has faced the longest and most intense war in its history, battling the Hamas terror group in addition to military engagements with Iran and its other regional proxies. The multifront conflict has thus far cost some NIS 300 billion ($88.7 billion), a figure that has sharply increased government borrowing and the country’s debt burden.
The Bank of Israel revised its growth projections for the economy with GDP growth of 3.3% in 2025 and 4.6% in 2026. Earlier this month, the Finance Ministry cut its 2025 growth forecast for the economy from 3.6% to 3.1%, on the assumption that the intensity of fighting in Gaza will continue only until the end of September. The growth projections do not take into account the potential costs of the recently approved plan to take over the densely populated Gaza City.
A medical staffer walks along a damaged area at the Soroka hospital complex after it was hit by a missile fired from Iran in Beersheba, Israel, Thursday, June 19, 2025. (AP Photo/Leo Correa)
Although Menahem expects much of the economic slowdown to reverse course, he cautioned that there is still ample uncertainty about the pace of a recovery.
“The recovery will be gradual and largely dependent on the political-security environment surrounding the economy down the road,” he said. “This will, of course, require a cautious fiscal policy, which will focus on growth-supporting items.”
Is The Times of Israel important to you?
If so, we have a request.
Every day, even during war, our journalists keep you abreast of the most important developments that merit your attention. Millions of people rely on ToI for fast, fair and free coverage of Israel and the Jewish world.
We care about Israel – and we know you do too. So today, we have an ask: show your appreciation for our work by joining The Times of Israel Community, an exclusive group for readers like you who appreciate and financially support our work.
Already a member? Sign in to stop seeing this
You appreciate our journalism
You clearly find our careful reporting valuable, in a time when facts are often distorted and news coverage often lacks context.
Your support is essential to continue our work. We want to continue delivering the professional journalism you value, even as the demands on our newsroom have grown dramatically since October 7.
So today, please consider joining our reader support group, The Times of Israel Community. For as little as $6 a month you’ll become our partners while enjoying The Times of Israel AD-FREE, as well as accessing exclusive content available only to Times of Israel Community members.
Thank you,
David Horovitz, Founding Editor of The Times of Israel