Macroeconomic and geopolitical developments – Weekly report, February 3, 2026
Recent data point to a clearer improvement in Israel’s macroeconomic fundamentals toward year-end 2025, supported by a rebound in activity, strong high-tech exports, and easing inflationary pressures. The recent upgrade in Israel’s credit outlook will reinforce confidence in the macro-fiscal environment heading into 2026.
On the political front, the 2026 state budget passed its first reading, increasing the likelihood of approval by March. While uncertainty regarding the conscription law persists, the baseline scenario remains budget passage, with any potential elections likely brought forward by only a limited number of months, with June or October now the main options.
Economic indicators continue to strengthen. High-tech service exports remain a key growth engine and a major source of FX inflows, while VAT-based revenues, industrial production, and business formation data point to a broad-based recovery, albeit with sectoral volatility.
At the same time, Israel’s long-standing demographic position is weakening. Net emigration has turned sharply negative, slowing population growth and easing housing demand. This shift has contributed to the recent stabilization in housing prices and is likely to continue moderating housing-related inflation.
Labor market conditions remain tight. Unemployment is low and vacancy rates remain elevated. At the same time, the labor force participation rate, particularly among prime-age workers, has only partially recovered from its 2024 decline, indicating continued labor supply constraints and upward pressure on wages. As a result, the likelihood of an additional rate cut at the February 23 policy meeting has weakened.
The shekel has appreciated markedly, driven primarily by renewed FX sales by nonresidents, reduced FX exposure by institutional investors, and structurally strong high-tech inflows. Looking ahead, appreciation pressures are expected to moderate, with stabilization rather than reversal as the central scenario.
Finally, Moody’s reaffirmed Israel’s Baa1 rating and upgraded the outlook to stable, reflecting easing geopolitical risks and an improving macro-fiscal path, while noting that political uncertainty remains a key risk factor.
Looking ahead, the coming week will provide a broad snapshot of economic conditions at the start of 2026, with key releases on wages, FX flows, tourism, and business sentiment. Particular attention will focus on wage dynamics, and Q4 FX trading data, which will help assess the sustainability of the shekel’s appreciation.
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