This study reviews the economic performance and examines the medium-term prospects for the Palestinian economy. Since October 2000, the economy has been severely dislocated by the Palestinian-Israeli conflict, causing a severe decline in income and output in the West Bank and Gaza. While this paper discusses the economic consequences of the conflict and related closures, it also looks beyond these immediate and severe problems to the challenges and opportunities that will face the Palestinian economy over the medium term, especially those arising from important demographic changes now underway. Although how and when the present conflict is resolved will have major implications for economic performance in coming years, addressing the policy challenges raised in this paper will still be crucial for the success of the Palestinian economy over the longer run.