GDP surged at a 15.4% annualized rate in the second quarter of 2026 while inflation fell to 1.5%, as outbound travel recovered to 93% of its historical peak.
Nearly three years after the events of October 7, 2023, the Israeli economy has demonstrated a level of resilience that has surprised even the international institutions monitoring it. During its February 2026 mission, the IMF described the country’s performance as “remarkably resilient,” noting that economic activity accelerated sharply following the ceasefire in Gaza.
Figures released by Israel’s Central Bureau of Statistics in August leave little room for ambiguity. GDP expanded at an annualized rate of 15.4% in the second quarter of 2026, equivalent to 3.6% quarter-on-quarter growth, reversing the 3.8% annualized contraction recorded in the first quarter, which was still heavily affected by the aftermath of the June 2025 conflict with Iran. Over the first half of the year, the economy grew by 3.2% compared with the second half of 2025. Exports advanced at an annualized pace of 25.2%, while fixed investment rose 10.6% over the same period.
The headline figures, however, tell only part of the story. Excluding the overseas operations of Israeli firms, particularly the global activities of the country’s technology sector, first-half growth falls to just 1%. Private consumption declined by 0.4%, underscoring the gap between the internationally oriented segments of the economy and the domestic sectors still grappling with the consequences of reserve mobilizations, labor shortages and lingering uncertainty.
This is Israel’s own version of a two-speed economy: a high-tech sector attracting roughly $4 billion in capital every quarter and driving the macroeconomic data, alongside a domestic consumer who has yet to fully normalize spending patterns. Even so, the Bank of Israel projects GDP growth of 4% in 2026 and 5.5% in 2027, supported by the return of mobilized human capital and a renewed investment cycle postponed during the war years.
Inflation Tamed, Purchasing Power Restored
Paradoxically, the greatest success of Israel’s wartime economy may be found on the inflation front.
Annual inflation fell to 1.5% in July 2026, its lowest level since May 2021 and less than half the 3.1% recorded a year earlier. The figure places inflation near the lower end of the Bank of Israel’s target range of 1% to 3%. After holding interest rates at 4.5% through nearly two years of conflict, the central bank delivered three rate cuts in 2026, in January, May and July, bringing the benchmark rate down to 3.5%. Its research department foresees a further decline toward 3% during the 2026-2027 period.
A key factor behind this disinflation has been the shekel. Israel’s currency has strengthened beyond the threshold of three shekels per dollar, reaching its strongest level in years. The appreciation has reduced import costs while significantly boosting Israelis’ purchasing power abroad.
The imbalances, predictably, remain in familiar areas. Rents on newly signed leases continue to rise by around 7% year-on-year. Wages are increasing at a pace of 6.8% amid a labor market characterized by just 3% unemployment and a vacancy rate of 4.2%. Meanwhile, the fiscal burden of the war remains substantial. Without cuts to defense spending, the public deficit is expected to end 2026 at roughly 4.9% of GDP, while public debt stabilizes near 69% of output. That level remains modest by the standards of many European economies, yet it represents the loss of a decade of fiscal consolidation for Israel. Moody’s, which downgraded the country’s sovereign rating to Baa1 during the escalation of 2024, has since maintained a stable outlook, acknowledging the economy’s resilience despite the cumulative costs of conflict.
Outbound Tourism: A Recovery in Three Acts
Few datasets capture Israel’s wartime trajectory as vividly as outbound tourism.
The first act was collapse. Following the Hamas attack of October 7, 2023, most foreign airlines suspended flights to Tel Aviv, leaving El Al and a handful of Israeli carriers as the country’s primary air links. The result was effectively a captive market, with fares reaching record highs and prompting class-action lawsuits alleging price abuse by the national carrier. Capacity was severely constrained, yet demand proved remarkably resilient. Even in 2024, amid a multifront conflict, Israelis still made more than seven million international trips.
The second act was the interrupted normalization of 2025. As foreign airlines gradually returned, Ben Gurion Airport handled 7.7 million passengers during the first half of the year, a 28% increase compared with the same period in 2024. Between January and May, passenger traffic was growing by as much as 50% year-on-year. Then came the 12-day conflict with Iran in June, which temporarily shut Israeli airspace and caused traffic to plunge by 41.4%, to 833,000 passengers. Once restrictions were lifted, pent-up demand returned almost immediately.
The third act is unfolding during the summer of 2026, the busiest since the war began. Israel Airports Authority forecasts 2.6 million passengers in August alone, with peak days approaching 100,000 travelers and 47 airlines operating services. Capacity remains below prewar levels, helping explain why delays have increased by 24%. Industry estimates place outbound demand at roughly 93% of its historical peak despite elevated airfares and growing concerns among some travelers about how an Israeli passport is perceived in certain destinations.
A Mediterranean Market Looking Close to Home
The geography of Israeli travel remains overwhelmingly Mediterranean and short-haul.
Greece continues to dominate. The Tel Aviv-Athens route was the busiest international connection during the first half of 2026, carrying 563,000 passengers. The United States, Cyprus, Italy, the United Arab Emirates and France follow behind, while Georgia, Hungary, Poland and Bulgaria rank among the fastest-growing destinations.
Several structural factors continue to support outbound demand. The strong shekel has made foreign holidays comparatively affordable, while domestic tourism has become more expensive. Overnight stays by Israeli residents in local hotels fell by nearly 15% in 2025, encouraging travelers to look abroad for better value.
Spain, however, is notably absent from the picture. No Spanish destination ranks among the ten leading destinations for Israeli travelers in 2026. Booking data for the 2025-2026 winter season show Spain falling out of the top ten altogether. Germany has experienced a similar decline, while the United Kingdom has slipped beyond the top fifteen. At the same time, Hungary has climbed to second place and countries such as Romania, the Czech Republic and Poland have absorbed demand that was once distributed among Western European capitals.
The shift cannot be separated from the political deterioration in bilateral relations.
Since Spain’s recognition of a Palestinian state in May 2024, tensions have steadily escalated. In September 2025, Prime Minister Pedro Sánchez’s government imposed a comprehensive arms embargo and prohibited military shipments to Israel from transiting Spanish ports and airspace. Israeli Foreign Minister Gideon Saar denounced the measures as antisemitic and barred two Spanish ministers from entering Israel. Madrid responded by recalling its ambassador for consultations and, in March 2026, permanently withdrew the envoy. Israel followed suit. Today, diplomatic relations operate at the level of chargé d’affaires, the lowest formal tier of representation. Symbolic disputes have reinforced the divide, including Spain’s refusal to participate in Eurovision alongside Israel and pro-Palestinian protests that disrupted the 2025 edition of La Vuelta.
Perceptions of security have compounded the diplomatic rift. According to a report published by Spain’s Interior Ministry in June 2026, 69 antisemitic incidents were recorded in 2025, an increase of 86% from the 37 incidents reported the year before. Highly publicized episodes, ranging from Israeli tourists reportedly expelled from a Madrid museum amid verbal harassment to incidents involving Israeli visitors near Barcelona and Vigo, as well as the harassment of French Jewish tourists in Barcelona during the summer of 2026, have received extensive attention in Israel. Israeli tour operators frequently cite these developments, together with recurring pro-Palestinian demonstrations, as factors behind the growing shift toward Central and Eastern Europe.
Yet the market has not written Spain off entirely. Israir has announced a new direct Tel Aviv-Madrid service, scheduled to launch in October 2026 with three weekly frequencies. The move suggests that latent demand remains intact if the political and social climate stabilizes. History offers a useful precedent: Israeli travelers have repeatedly shown a willingness to return quickly to destinations once they perceive a return to normality.
Outlook: A Strategic Opportunity for Tourism Destinations
The principal downside risk remains the possibility of renewed regional instability and the temporary closure of Israeli airspace, a scenario highlighted by the IMF. Barring such disruption, however, the central outlook remains highly attractive for tourism destinations.
Israel is a market of ten million residents with per capita income levels above much of Western Europe, one of the highest travel propensities in the world, wage growth approaching 7%, a strong currency and a consumer base that has demonstrated an extraordinary willingness to travel despite two wars in less than three years. As foreign airlines complete their return during 2026 and 2027, lower airfares are likely to unlock additional demand.
For Spain, the strategic implications closely resemble those of the Greek market. Israeli travelers are choosing their preferred destinations now, during the reopening phase, while connectivity is being rebuilt and travel patterns are being reshaped. Greece, Cyprus and Italy have been the primary beneficiaries of Spain’s absence. Reclaiming market share will therefore require both direct air connectivity and a competitive mix of urban and coastal tourism products.
The Israeli paradox is striking: a wartime economy posting record growth while its citizens once again fill aircraft bound for foreign destinations. For the European tourism industry, it may also represent one of the clearest growth opportunities currently emerging from the Eastern Mediterranean.
