Less than a week has passed since I wrote here that Israel is growing faster than any G7 country. This week, the Central Bureau of Statistics published the growth figures for the first quarter of 2026. GDP — meaning the total of everything the country produced and sold in the quarter — contracted by 3.3%. Not growth. Contraction. So what happened? Was it all an exaggeration? No. And now let’s explain why.
What Happened in the First Quarter
At the end of February 2026, the military conflict between Israel and Iran broke out. We’re not talking about a matter of days — we’re talking about weeks of ballistic missile fire, school closures, massive reserve mobilization, and the immediate collapse of tourism. The result: private consumption — meaning how much Israelis spent on shopping, restaurants, and services — fell 4.7%. Exports dropped 3.7%. And even government spending fell 4.8%. Three growth engines stopped at once, for more than a month. On paper — it looks bad. In the headlines — it sounds catastrophic.
But there is one number the media barely reported on: investment in fixed assets — construction, equipment, technology — rose 12.6%. The technology sector didn’t stop. The energy sector kept investing. Whoever planned to build — built. Whoever planned to develop — developed. Israel’s internal economic engine didn’t turn off — it simply worked behind the scenes, while the part visible to the eye was in shock. And one more thing that didn’t make the headlines: analysts had forecast a 4% decline. Israel surprised to the upside even with its 3.3%.
One Bad Quarter Doesn’t Break a Good Story
Think of a store that grows every year. One day, the road leading to it is closed for repairs. For a full month, no customers come through. Revenue collapses. Did the store go bankrupt? No. Are its products any worse? No. Did the customers disappear? No. They simply didn’t come — because the road was closed. The right question is: when the road reopens, will they come back?
For Israel, the closed road was the war. The Bank of Israel’s answer — which knows the numbers better than anyone — is still the same: if the ceasefire holds, the economy will grow 3.8% for the full year. And if the peace talks conclude successfully, the Governor said it’s possible to reach 5.5%.
The story of the first quarter is really a demonstration of the difference between the temporary and the permanent. If a long-running process is stopped by a one-time event — however powerful and however significant — that carries no negative long-term consequences, then you can and should ignore it and stay committed to the long-term trend. In fact, these one-off events are precisely the ones that serious investors use to profit over the long run.
On that note, I have a good example — for those of you whose memory isn’t betraying them, and who also sin by investing in the stock market: you may recall that last April, Trump announced a sweeping tariff policy against countries around the world, a move that led many economists and investors to fear it would upend the global order and damage their securities holdings. Anyone who had accumulated enough mileage (or kilometrage, depending on your side of the Atlantic) in understanding Trump’s methods knew to assume this was more declaration than implementable policy — a kind of diplomatic opening position for a dialogue whose results would be very minor, if any at all. And therefore, within the sharp market drops that followed the announcement, that person could have bought stocks cheaply — sometimes even very cheaply.
And Then, on Friday — Trump Surprised (Again?)
The announcement of an imminent deal with Iran is not yet official. Trump likes to get ahead of himself and announce things early (as noted). But when you try to understand what’s behind it — we’re talking about an agreement that would end the military conflict between the U.S. and Iran and return the Strait of Hormuz to full operation. Hormuz — already mentioned in Letters #01 and #09 — is the narrow chokepoint through which nearly a third of global oil and gas trade passes. When it’s restricted, energy prices rise. And high oil prices mean: inflation in the U.S., expensive fuel, expensive plane tickets, and pressure on every monthly household expense.
And now — connect the two threads.
The war with Iran is what hurt Israel in the first quarter — and also what’s keeping inflation high in the U.S. The same war, two victims on two sides of the ocean. And the same agreement — if signed — will release both: Israel returns to full growth, and the U.S. gets relief on energy prices and room to cut interest rates.
What This Means for Your Pocket
If you’re Israeli and were alarmed by the 3.3% figure: stop. The number explains what happened — not what will happen. The reason for the bad quarter is clear, contained, and not structural. The Bank of Israel did not change its annual forecast. And if the ceasefire holds — Israel enters 2027 with strong momentum. If you’re holding Israeli stocks: ask the same question from recent weeks — has the story changed? In my view — not yet. But make sure you’re looking at the full picture, not just the quarterly one.
If you’re American, living with inflation, and waiting for the Fed (the U.S. central bank) to cut rates: the Hormuz deal — if signed — is the best economic news that could reach you this year. Cheaper energy will bring inflation down, and the Fed will finally get the breathing room it’s been waiting for.
And for all of us: this week was another reminder that one number never tells the whole story. Israel minus 3.3% — published everywhere. Israel with 12.6% growth in investment in the same quarter — almost no coverage. It’s always like that. The headline is easy to write. The context takes two or three more sentences. And we’re here for the context.
We shall see.
See you in next week’s letter, or during the week — if I can’t help myself until then...