Fitch’s statement highlighted Israel’s diversified economy, strong financial position, and robust high-tech sector as key stabilizing factors. However, the agency pointed to high public debt, ongoing security threats, and political instability as challenges to Israel’s economic outlook.

“The negative outlook reflects the increase in public debt, domestic governance and political challenges, and uncertainties surrounding the conflict in Gaza,” Fitch stated.

Fitch reported a decrease in Israel’s government deficit, which fell to 5.7% of GDP in 2025, down from 6.8% in 2024, due to increased revenues and lower defense spending. However, the agency warned that the approved 2025 budget underestimates the financial impact of the ongoing war in Gaza, forecasting a higher-than-expected deficit of 4.9% of GDP.

Looking ahead, Fitch projects Israel’s economic growth at 3% in 2025 and 3.6% in 2026, anticipating a decline in military mobilization and a boost in investor confidence as large-scale military activity diminishes. The high-tech sector, which demonstrated resilience in 2024, is expected to continue driving growth.

Fitch also expressed concerns about political and governance risks, warning that recent judicial reforms could weaken Israel’s institutional framework. “A reform of the judicial system recently approved by the Knesset, which expands political control over judicial appointments, could undermine checks and balances,” the agency noted. Growing public divisions over governance policies were also highlighted as a risk factor.

Fitch’s analysis suggests that Israel will remain significantly involved in Gaza in the medium term and anticipates renewed conflict, including air and ground operations. However, the agency expects reduced military mobilization compared to 2023, lessening the war’s economic strain.

On a broader regional scale, Fitch acknowledged that Israel’s military actions in 2024 weakened Iranian-backed militias and bolstered its strategic position. While localized security flare-ups may persist, tensions with Hezbollah are expected to remain contained, and Syria’s instability poses fewer short-term risks to Israel.

While maintaining Israel’s rating, Fitch’s continued negative outlook leaves open the possibility of a downgrade in future evaluations. Analysts speculate that, had it not been for recent security escalations and internal political disputes, Fitch might have upgraded Israel’s rating outlook from negative to stable.

This rating decision follows a physical visit by Fitch analysts to Israel, marking the first in-person assessment by a credit agency since the war began. The two other leading rating agencies, S&P and Moody’s, have yet to release their latest evaluations, with Moody’s skipping the current review round and S&P expected to announce its decision next month.

For now, Israel remains rated A by Fitch and S&P, while Moody’s places the country two notches lower at Baa1, underscoring ongoing financial and geopolitical uncertainty.

Main photo: The Fitch Rating logo at their offices in London. Reuters/Reinhard Krause

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Financial statements from 2024 reveal a surprising trend: Israeli businesses not only weathered the war but thrived. As Mizrahi Tefahot Bank CEO Moshe Lari observed, “We are seeing records in revenue, profitability, yield, and dividend distribution across banking, insurance, retail, and real estate. It’s as if we’ve normalized the chaos.”

A key factor behind this resilience was the state’s injection of NIS 20 billion into the economy, with 75% funneled into consumer spending. According to the Bank of Israel, private consumption grew by 5.4% at the end of 2024 compared to pre-war levels. Despite expectations of economic stagnation, tax revenues exceeded forecasts, reaching over NIS 455 billion.

Food retailers saw operating profits soar by 58%, reaching NIS 1.9 billion, fueled by price hikes and increased domestic spending. “People stayed in Israel longer and bought more,” noted industry expert Uri Bartov. The disruptions in global supply chains allowed local manufacturers to capitalize on limited imports, further driving profits. Fashion retailers also saw a surge, with sales at leading brands jumping 15%. Consumers, unable to travel abroad, redirected spending to local brands. Castro led the industry with a 19% sales increase, and its stock price soared by over 150%.

The insurance industry doubled its profits, reaching NIS 6.4 billion across Israel’s five largest firms. Concerns about war-related claims were offset by state compensation programs and stock market gains. “The low unemployment rate and the market’s overall rise supported insurance profits,” explained Lior Yochafez, Deputy CEO of Menora Mivtachim.

Israeli banks thrived amid high interest rates, collectively earning NIS 30 billion—up 17% from the previous year. “The interest rate environment remained elevated due to war-related risks, benefiting banks through high credit spreads,” said Clal Insurance’s Uri Bartov. Bank stocks surged by over 40% in 2024, contributing to record highs in the Tel Aviv Stock Exchange. With Israelis spending more domestically, credit card transactions soared to NIS 563 billion, a 12% increase. Generous government grants and flexible payment plans encouraged higher credit usage, driving profits for Isracard, Cal, and Max.

Despite labor shortages and extended construction timelines, Israel’s real estate sector flourished. Sales of new apartments surged by 144%, supported by aggressive 20/80 financing deals. “The housing market always finds a way to recover and grow stronger,” noted Sigma-Clarity’s Yair Shani. However, recent regulatory measures limiting contractor financing may temper future growth. With international travel curtailed, Israeli shopping malls saw increased foot traffic and spending. Revenue for Azrieli, Melisron, and Big increased by 13%, driven by a shift in consumer behavior. “Malls gained from Israelis staying put and redirecting entertainment budgets locally,” noted investment analyst Yaniv Pagot.

While parts of the economy faced difficulties, the largest and most influential corporations thrived. The war led to increased government spending, supply chain disruptions that favored domestic producers, and shifts in consumer behavior that boosted demand for local goods and services. The unexpected outcome of 2024 has demonstrated the resilience of Israel’s economic infrastructure and its ability to adapt in times of national crisis.

Image credit: Freepik

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Market analysts attribute the shekel’s recent weakness primarily to domestic political and security concerns. The collapse of the ceasefire with Hamas and the resumption of intense fighting have heightened uncertainty in Israel’s economy. This has led to a rise in the country’s risk premium, discouraging foreign investment and weakening the shekel.

Political instability has also played a role. The government’s decision to dismiss Shin Bet chief Ronen Bar, followed by a High Court ruling that temporarily froze the move, has fuelled tensions within Israel’s leadership. The political friction adds to investor anxiety, further pressuring the local currency.

Rafi Ghozlan, chief economist at IBI Investment House, noted that Israel’s market is shifting from a period of ceasefire and potential normalization with Saudi Arabia to renewed military action and legal uncertainties. “The combination of war and legal reform concerns, along with global market declines, is driving the shekel’s weakness,” he explained.

The key question now is whether this trend will persist or if the shekel will stabilize. Over the past year, the currency has fluctuated within a 3.60–3.80 shekel-per-dollar range. Ghozlan suggests that under the current circumstances, the shekel could move toward the weaker end of this spectrum. Therefore, unless geopolitical tensions ease or external economic factors shift in Israel’s favour, the shekel may continue facing downward pressure in the coming weeks.

Image credit: Freepik

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Founded in 2016 by entrepreneurs Guy Goldstein, Alon Khoury, and Nissim Tapiro, Next Insurance specializes in digital insurance solutions tailored for small and medium-sized businesses in the United States. The company utilizes artificial intelligence and machine learning to streamline underwriting and policy approvals, offering coverage across 1,300 different insurance categories. With over 500,000 active customers, Next Insurance has positioned itself as a key player in the digital transformation of the insurance industry.

The acquisition marks a near-complete takeover by Munich Re, which has been investing in Next Insurance since 2017. Prior to the deal, the German reinsurer held a 29% stake in the company. Munich Re and its subsidiary, Argo, will acquire the remaining shares for $1.84 billion from existing investors. According to reports, Argo is expected to generate substantial net profits in the medium term as a result of the transaction.

Despite the acquisition’s positive outlook for Munich Re, not all investors fared equally well. Investors from the company’s 2021 funding round, including Battery Ventures and Israeli fund FinTLV, had backed Next Insurance at a $4 billion valuation. While the current sale represents a modest increase from its late 2023 valuation, it still reflects a 35% decline from its peak. However, sources indicate that 2021 investors had structured protections to minimize potential losses from valuation declines.

The deal also highlights the role of strategic investors in shaping Next Insurance’s trajectory. Previous backers included notable venture capital firms such as Zeev Ventures, Group 11, TLV Partners, and Redpoint, alongside large Israeli institutional investors like Bank Hapoalim, Migdal, and Psagot. Additionally, insurance giants Allianz X and Allstate played a strategic role in expanding Next Insurance’s market reach, particularly in real estate and auto insurance.

CEO and co-founder Guy Goldstein hailed the acquisition as a milestone for the company. “This transaction will accelerate our mission to provide an easy, efficient, and personalized insurance experience for small business owners. With the strength and expertise of ERGO and Munich Re, we will continue leading the small business insurance revolution in the U.S.,” Goldstein stated in a press release.

Image credit: The logo of reinsurance company Munich Re Group at their headquarters in Munich, Germany. REUTERS/Andreas Gebert

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The Israeli Air Force commenced a series of targeted strikes against Hamas positions across Gaza, marking the most extensive aerial assault on the group since the conclusion of last year’s ground manoeuvre. Military sources indicate that the operation, meticulously planned in secrecy, aims to neutralize high-ranking Hamas leaders, weapons storage facilities, and underground tunnel networks.

The new Chief of Staff Eyal Zamir is commanding the operation together with Shin Bet Director Ronen Bar from the Kirya military headquarters in Tel Aviv. According to security officials, the offensive will continue for as long as necessary and may expand beyond aerial strikes if deemed appropriate.

Prime Minister Netanyahu, citing the urgency of the situation, has been granted permission to postpone his scheduled testimony in his ongoing corruption trial, as the air campaign takes precedence.

The White House has confirmed that it was informed in advance of Israel’s military action. White House spokesperson Caroline Levitt stated that former President Donald Trump warned, “Hamas, the Houthis, and Iran will face severe consequences for their actions against Israel and the United States.”

Meanwhile, Hamas has condemned the Israeli offensive, accusing Netanyahu’s government of “renewing aggression against defenceless civilians in Gaza.” The group further warned that the cancellation of the ceasefire agreement endangers Israeli hostages held in the enclave. Palestinian sources report over 200 fatalities in Gaza, including several high-ranking Hamas officials, among them Mahmoud Abu Watfa, the head of Hamas’s Interior Ministry.

With the renewed hostilities, the IDF Home Front Command has adjusted security measures in border communities, restricting educational activities in areas near Gaza while maintaining regular activity levels in western Negev and Lachish regions.

Defense Minister Katz emphasized that military pressure will continue until all Israeli hostages are freed and all strategic war objectives are achieved. “If Hamas does not release the hostages, the gates of hell will open in Gaza,” he warned.

As the conflict escalates, Israel braces for potential retaliatory attacks, while diplomatic channels remain strained amid growing concerns over regional stability.

Main image credit: On the right, Shin Bet chief Ronen Bar, Chief of Staff Eyal Zamir, and Air Force commander Tomer Bar, in Kirya headquarters. ( Photo: IDF Spokesperson )

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A major factor behind the January spike in the construction input index is the shifting workforce composition in the construction industry. The war led to restrictions on Palestinian workers, who previously constituted a significant portion of the labor force. To fill the gap, Israel has turned to foreign workers, particularly from countries like India, who demand higher wages – more than double that of Palestinian workers. As a result, labor costs have surged, driving up overall construction expenses.

The Central Bureau of Statistics (CBS) updated its methodology to reflect the real composition of workers. Previously, the index was calculated based on outdated weight distributions set in 2011, which assumed a workforce that was 95% Israeli and only 5% foreign or Palestinian. In contrast, the actual workforce prior to the war consisted of approximately 71% Israeli and 29% foreign and Palestinian workers. The CBS has now adjusted the index to align with these realities, incorporating changes in worker composition and wage estimates that had been accumulating since the war began.

The result of these changes is a stark 5.3% increase in the residential construction input index over the past year and a 12.3% increase since the war started. The January update alone reflected a 4.5% increase in labor costs, compared to a mere 1.1% rise in other construction-related expenses. This recalibration means that real estate contracts linked to the construction index will now carry higher price tags, adding financial pressure on home buyers while benefiting property sellers.

Alongside construction-related price hikes, government-imposed tax increases have also played a pivotal role in driving up the overall CPI. A series of tax hikes that took effect on January 1 were among the leading contributors to inflation, particularly in four key categories: cigarettes and tobacco (up 5.2%), electricity (4.1%), municipal taxes (2.3%), and new cars (2.2%). If not for these tax-related increases, the CPI rise in January would have been only half of what was recorded.

Fuel and water prices, which are also regulated by the government, saw significant increases as well. However, one notable factor that helped to moderate inflation was a drop in flight prices. Airfare costs declined by 5.7%, as fewer Israelis travelled abroad in January, leading to lower demand and consequently lower prices. This decrease in flight prices helped to counterbalance some of the CPI’s upward pressure.

With the residential construction input index recalibrated to reflect actual market conditions, housing prices are expected to remain elevated, making affordability a growing concern for potential homebuyers. The combination of rising labor costs and government-imposed taxes suggests that inflationary pressures will persist in the near term.

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Yaron also told Reuters that a stronger shekel and faster inflation moderation could accelerate these cuts. On the broader economic front, he linked regional stability to economic growth, emphasizing the potential benefits of a lasting ceasefire following the recent conflict. He predicted GDP growth of 4% in 2025 and 4.5% in 2026, following a modest 0.6% in 2024, provided further escalations are avoided.

While addressing Israel’s rising budget deficit due to significant war expenditures, Yaron praised the 2025 budget’s emphasis on fiscal responsibility, including spending cuts and tax increases. He noted that while defense spending might increase the debt burden in 2025, adjustments in the 2026 budget would likely stabilize the debt-to-GDP ratio.

International credit rating agencies have also weighed in on Israel’s economic outlook. Both Fitch and Moody’s suggested that a stable ceasefire could reduce risks to Israel’s credit rating, which had been under pressure in recent months. However, S&P warned of the agreement’s fragility, highlighting the potential for renewed regional conflicts, including tensions with Hezbollah in Lebanon and disruptions in the Red Sea.

Israel’s debt-to-GDP ratio, which climbed to 69% in 2024—the highest level since 2010 excluding the pandemic—remains a significant concern. This increase reflects the immense costs of the Iron Sword War, estimated at approximately NIS 100 billion. Despite this, historical trends indicate that Israel has previously succeeded in reducing its debt ratio over time, offering hope for a return to fiscal stability.

Image credit: Bank of Israel Governor Amir Yaron (REUTERS/Ronen Zvulun)

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Traditionally, January is a sluggish period for the retail sector, falling right after the end-of-year sales boom, devoid of holidays, and typically hampered by winter’s chill. However, this year’s dynamics have shifted dramatically. The government’s decision to raise VAT from 17% to 18%, combined with widespread price increases by suppliers and food chains, has paradoxically driven consumer spending upwards.

The tourism industry has experienced the most significant growth, with transaction turnover soaring by 18% compared to the previous week. This surge is largely attributed to the return of several international airlines such as British Airways, Lufthansa, and easyJet. Despite a 2% drop in the average purchase price, the overall transaction volume surged by 20%.

Following close behind, the electronics and computer sectors have also shown robust recovery. The computers and cell phones segment recorded a 16% uptick in turnover, driven by a 5% increase in transaction numbers and a 10% rise in the average purchase amount. Similarly, the electricity sector noted a 12% increase in turnover, signalling renewed consumer interest after weeks of decline.

“This past week marks the first in 2025 where we observed positive growth in shopping cycles across most consumer and entertainment sectors,” stated Nadav Lahmani, CEO of Control at Phoenix Gamma. He added, “The return of international airlines and the expanded flight availability could potentially lead to reduced flight prices and a further decrease in the average purchase amounts within the travel industry.”

The current trends suggest a potential stabilizing effect on the economy, with increased consumer activity possibly setting the stage for sustained growth in the coming weeks. The interplay of external factors, such as geopolitical developments and climatic conditions, alongside fiscal policy changes, underscores the complexity of predicting consumer behaviour in the evolving economic landscape.

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Given the geopolitical and fiscal uncertainties, and the expectation of an inflation environment above the target throughout the coming year with only gradual improvement in supply constraints, we anticipate stability in interest rates at least through the first half of the year. This is until a noticeable improvement in supply constraints emerges, accompanied by a step-down in the inflation environment towards the target. We share the Bank of Israel’s assessment that the inflation risk is skewed upwards, suggesting that conditions for an interest rate change may arise at the earliest in the second half of 2025. Accordingly, our interest rate forecast ranges from stability to a moderate reduction of up to 50 basis points by the end of 2025.

As expected, the Monetary Committee once again left the interest rate unchanged at 4.50%. The future guidance also remained unchanged, indicating that the interest rate trajectory will be determined by the ongoing convergence of inflation towards the target, stability in financial markets, economic activity, and fiscal policy. The overall tone from the announcement and the Governor’s remarks at the press conference was more optimistic about economic activity, given the decline in the country’s risk premium, but more cautious about inflation, due to inflation stabilizing above the target and the assessment that inflation risk is tilted upwards.

The Committee continued to highlight supply constraints as a factor moderating economic activity on one hand, while contributing to a high inflation environment on the other, partly due to a persistently tight labor market. Nevertheless, it appears that the decline in the risk premium has led to a slightly more optimistic tone regarding economic activity. In addition to raising the growth forecast for 2025, the Committee expects demand surpluses in the economy, which will support inflation growth in the first half of the year (in combination with supply constraints and tax increases), with inflation expected to moderate towards the target only in the second half of the year. However, the Committee continues to see upward inflation risks stemming from geopolitical conditions, supply constraints, currency volatility, and fiscal developments. Consequently, the Governor hinted that, barring significant surprises relative to the baseline scenario, discussions about an interest rate cut will become more relevant only in the second half of the year.

The Governor noted that beyond the relative improvement in the geopolitical situation and a decline in security risks, the reduction in the risk premium was also supported by the passing of the government budget. However, the assessment of fiscal policy was accompanied by a more cautious tone due to concerns that in the final stages of budget approval, some adjustments may be abandoned in favor of a larger deficit. Additionally, there is uncertainty regarding the implementation of necessary adjustments in light of recommendations for military strengthening. The Governor also pointed out issues with the budget composition in terms of growth incentives, the negative implications of not recruiting ultra-Orthodox Jews into military service, and renewed threats from government steps to weaken institutions.

As part of the interest rate announcement, research department forecasts were updated. Growth forecasts for 2024 and 2025 were revised from 0.5% and 3.8% to 0.6% and 4%, respectively. The 2024 forecast was mainly updated due to accelerated activity (primarily vehicle imports) before the VAT increase. This development also contributed to a downward revision of the 2024 budget deficit forecast to 7% of GDP (from 7.2% previously and 7.7% in the last budget update). The 2025 growth forecast includes an expected further decline in the unemployment rate from 3.5% to 3.1% and an unexpected upward revision of private consumption from 7% to 7.5%, despite anticipated moderating effects from government measures. Nonetheless, the inflation forecast for 2025 was lowered from 2.8% to 2.6%, mainly due to the strengthening of the shekel. Following the budget proposal, the public consumption forecast was revised upward to a decrease of only 1.5% (from 4% previously), while the investment forecast was revised downward to 8% (from 12% previously), mainly due to labour constraints in the construction sector. The government deficit forecast for 2025 was revised from 4.9% to 4.7% of GDP, with an expected increase in the debt-to-GDP ratio to 69%. The interest rate forecast was also revised downward, including a moderate reduction of 25-50 basis points to levels of 4.25%-4.0% by the end of 2025, compared to the previous forecast that assumed stability at 4.5% by the end of the third quarter of 2025.

In summary, given the geopolitical and fiscal uncertainties and the expectation of an inflation environment above the target throughout the coming year with only gradual improvement in supply constraints, we continue to anticipate stability in the interest rate at least through the first half of the year. This will be until a certain improvement in supply constraints becomes evident, accompanied by a step-down in the inflation environment towards the target. We share the Bank of Israel’s assessment that the inflation risk is tilted upwards, indicating that conditions for an interest rate change may emerge at the earliest in the second half of 2025. Accordingly, our interest rate forecast ranges from stability to a moderate reduction of up to 50 basis points by the end of 2025.

Authored by:
Rafi Gozlan, Chief Economist, IBI Investment House

Main article photo: The Bank of Israel building Jerusalem. (Reuters/Ronen Zvulun)

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The Tel Aviv Stock Exchange’s flagship index, the TA-125, has delivered a robust performance, outpacing the S&P 500 in recent months. This surge is particularly noteworthy given the underperformance seen in the previous year due to political instability and the outbreak of war in October 2023. The easing of tensions on the northern front and a decrease in risk premiums have contributed to this rally, marking a turnaround for Israel’s financial markets.

Another indicator of economic recovery is the resurgence in foreign investments. The Central Bureau of Statistics reported that foreign investments in Israel reached $11.5 billion in the third quarter of 2024, the highest quarterly figure since 2021. This influx underscores the sustained attractiveness of Israel’s economy, particularly its high-tech sector, which remains a pivotal driver of growth.

Israel’s current account surplus has also seen a significant rise, with a cumulative surplus of $24.8 billion recorded between late 2023 and the third quarter of 2024. This surplus reflects a strong export performance and supports the appreciation of the shekel, which has strengthened by over 5% against the dollar since the war began. The robust currency helps moderate inflation, providing relief for both businesses and consumers.

In a global ranking by The Economist, Israel secured sixth place among the strongest economies of 2024. Factors contributing to this recognition include impressive stock market returns, low unemployment, and a 6.7% growth rate for the period measured. While global economies like Spain, Greece, and Italy topped the list, Israel’s performance stood out amidst its challenges.

Despite these positive developments, certain vulnerabilities remain. Israel’s annual GDP growth for 2024 is projected to be near zero, with per capita growth expected to decline. Additionally, a rising deficit, anticipated to exceed 7.5% by year-end, and multiple credit rating downgrades highlight underlying economic pressures. International observers have also expressed concerns about the pace of Israel’s post-war recovery.

Nonetheless, Israel’s economic fundamentals remain strong. Private consumption reflects optimism, and the Bank of Israel has proven its ability to stabilize markets, as seen in its intervention in the foreign exchange market at the outset of the war. Looking ahead, a strong shekel and moderating inflation rates provide further reasons for confidence. Economists expect inflation to return to the Bank of Israel’s target range of 1%-3% within the next year.

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