Israel’s economic outlook hinges on next government as shekel and stocks slide

Read the latest on Israel's election here

Israel’s next government will determine whether the country attracts fresh foreign investment and eases economic pressures, or faces deeper uncertainty over growth, public finances and its global standing.

Israeli markets weakened on Wednesday after an inconclusive election result left the shape of the next government unclear.

The shekel fell about 2 per cent against the dollar, its biggest intraday loss in two weeks and one of the steepest currency declines globally, reversing much of Tuesday’s gains. The benchmark Tel Aviv stock index, which was closed on Tuesday, fell about 3 per cent and was on track for its biggest decline since June.

Shares of Bank Hapoalim fell about 4 per cent, while Phoenix Financial slumped more than 5 per cent.

Israel’s economic outlook could diverge sharply depending on who forms the next government, with a right-wing coalition potentially deepening economic uncertainty and accelerating capital flight, while an opposition-led administration could help revive investor confidence, an economist tells The National.

“If [Prime Minister Benjamin] Netanyahu succeeds to head the government again with a coalition of right-wing parties, then the uncertainty surrounding the economy will soar, resulting in a weaker shekel and GDP growth,” says Naser Mufrej, professor of finance and economics at the Arab American University in Ramallah.

A Netanyahu-led coalition could also discourage investment in Israel’s high-tech sector and drive skilled workers and professionals abroad, further weighing on the economy, he adds.

The prospect of wider boycotts and deeper international isolation could put more pressure on exports and foreign capital inflows, according to Mr Mufrej. “The credit rating of Israel will be reduced, thus raising the cost of financing,” he says.

Show caption: The shekel fell about 2 per cent against the dollar on Wedne…

By contrast, a government formed by opposition parties with the support of Arab parties could offer a more positive economic trajectory, he says. Such an outcome could generate renewed investor optimism, support steadier economic growth and strengthen the shekel and the Tel Aviv stock market, he added.

It could also help lower inflation, attract more foreign investment and boost trade, Mr Mufrej says.

“The elections by themselves are not assumed to have any impact on the Israeli economy. What is important is who will form the government based on the results of the elections,” he says.

Capital Economics made a similar point in a report this month, saying the Israeli election was unlikely to have a major effect on the country’s near-term growth outlook or fiscal trajectory, but could have significant implications for the economy over the medium term.

The International Monetary Fund’s July 2026 assessment projected Israel’s economy would grow by 3.5 per cent this year and 4.4 per cent in 2027. That was based on the assumption that regional ceasefires would largely hold. It warned that persistent geopolitical uncertainty, elevated defence spending and labour supply constraints would continue to weigh on the recovery.

For investors, the next government’s success in reducing uncertainty and restoring international economic ties may determine whether this week’s market weakness persists or gives way to a recovery.