Israel's Economy Keeps Growing Through Years of War, but Voters Worry About Prices

Despite three years of multi-front conflict in the Middle East, Israel's economy has shown remarkable resilience. By many measures it is thriving — a sharp contrast to expectations of a bleak backdrop before the parliamentary election expected on October 27.

After a pronounced slowdown following the Hamas-led attacks of October 7, 2023 and the war in Gaza, Israel has rebounded to become one of the fastest-growing advanced economies in recent years. According to government figures, GDP grew 2.9 percent in 2025, up from 1 percent in 2024, and reached 3.2 percent in the first half of this year. The Bank of Israel forecasts 4 percent growth for all of 2026 and 5.5 percent in 2027, far outpacing the outlook for major economies such as the United States, Britain, France, Canada and Japan.

Over the past three years the shekel has strengthened against the dollar, hitting a three-decade high in May, while Israel's stock market has boomed, with the benchmark TA-125 index up more than 110 percent. Unemployment now stands at 2.8 percent, and inflation is contained at 1.5 percent.

Against that relatively bright economic backdrop, the campaign for the October 27 vote still revolves around national security. Prime Minister Benjamin Netanyahu, leader of the right-wing Likud party, and former general Gadi Eisenkot, who heads the centrist Yashar party, both insist they are best placed to keep Israelis safe.

The main engine of Israel's resilience is a booming technology sector, largely insulated from the conflicts stretching from Gaza, Lebanon, Syria, Iraq and Iran to Yemen. Although it has been in a state of war since October 2023, Israel still attracted record investment in technology — a sector that accounts for about one-fifth of economic activity — amid a global wave of artificial intelligence deployment.

Total foreign direct investment hit a record $26.2 billion last year, up 78 percent from 2024, led by record acquisitions by US tech giants Alphabet of Wiz and Palo Alto Networks of CyberArk, both Israeli cybersecurity companies. Foreign capital has continued to flow in this year, with a record quarterly figure of $14.1 billion between January and March, according to government data.

Besides benefiting from the global AI surge, Israel's tech industry has gained from close ties with the domestic defense sector, as the military increases orders from hundreds of startups supplying everything from radar systems to communications platforms and counter-drone technology.

According to Keren Uziyel, a senior analyst for the Middle East and Africa at the Economist Intelligence Unit (EIU), although Israel's economy has partly recovered on the back of solid job and wage growth, its resilience stems mainly from "an export story that reflects strong global demand for technology, especially in areas where Israel — and the multinationals operating from Israel — are globally competitive, such as cybersecurity and artificial intelligence."

Uziyel told Al Jazeera that demand for Israeli tech goods and services is driving foreign direct investment and venture capital fundraising at high levels, while strengthening capital markets, which in turn creates a significant wealth effect and boosts budget revenues.

However, Israel's military campaigns have consumed a large share of the public budget. In March, the Bank of Israel estimated the cost of the war so far at about 350 billion shekels ($114.6 billion), not counting the war with Iran that was just beginning then. Military spending is expected to rise sharply in the coming years as Israel's leadership continues to prioritize "national security."

Netanyahu, whose right-wing coalition treats security as "the foundation of everything," has pushed to raise the annual defense budget to 183 billion shekels ($60 billion), equivalent to about 9 percent of GDP. If approved, that would be two and a half times the level before October 7. Outgoing opposition leader Yair Lapid supports expanding the defense budget but disagrees with Netanyahu over how to fund it.

Economic worries

Although security dominates the pre-election period, opinion polls show Israelis also see the economy as a key concern. In a survey published last month by the Israel Democracy Institute, 38 percent of Jewish Israelis and 46 percent of Palestinian citizens of Israel — who make up about 20 percent of the population — named the economy and the cost of living as the most or second-most important election issue.

High living costs have long been a source of public frustration. Israel has for years ranked among the most expensive countries in the Organization for Economic Cooperation and Development, which economists attribute to limited trade ties with neighboring countries and cumbersome administrative regulations. Although headline inflation is modest, food prices have risen faster, climbing 8 percent between the start of 2024 and mid-2026, according to the consumer advocacy group Lobby 99.

Ayal Kimhi, vice president of the Shoresh Institution for Socioeconomic Research in Tel Aviv, said people are worried about the economy but mainly on a personal level, especially living costs, rather than about the macroeconomic picture. Still, he said, the security situation continues to dominate public discourse for obvious reasons, so the economy is unlikely to play a major role in how people vote. He also argued that some parties do not even offer a vision or agenda, while others do not differ much on economic issues.

Even though Israel's headline economic indicators are impressive, there are caveats. Economists point out that although growth is faster than in many peer countries, GDP is partly supported by typically high population growth, averaging nearly 2 percent over the past decade. In addition, the Bank of Israel estimates cumulative lost output through the end of 2025 at the equivalent of 8.6 percent of annual GDP.

Joseph Zeira, an economics professor at the Hebrew University of Jerusalem, said the country's economic performance is "not good at all" given that growth has consistently fallen below the pre-conflict trend since late 2023. He said real living standards vary by region, and Israelis are facing higher prices — in other words, lower real wages and income — along with deteriorating public services. The only improvement, he said, is that housing prices have eased somewhat thanks to a major construction wave in recent years.

Public debt

The long-term health of Israel's public finances is also a concern. Although the public debt-to-GDP ratio is around 68 percent, well below countries such as the United States, Britain, France and Italy, the gap between budget revenue and spending has widened rapidly over the past three years. In its latest annual report, the Bank of Israel stressed that the government's restoration of "an orderly budget process" and "credible" measures to reduce public debt are "essential."

Other long-term challenges include raising the labor force participation of ultra-Orthodox Jewish men — a group whose refusal of military service has become a major election issue — and Arab women (part of the Palestinian citizen population), both of whom have employment rates far below the general population.

Omer Moav, an economics professor at the University of Warwick and Reichman University, said the cost of military campaigns and mobilization has severely strained public finances. He said the deficit and national debt have widened significantly, making the current spending trajectory unsustainable without fiscal consolidation, and that the next government will face a very large challenge.

Whoever wins, economists say Israel's economic outlook will depend largely on whether regional conflict escalates or subsides. EIU's Uziyel forecasts growth of about 4 percent in 2026 and above that in 2027, but warns there are still significant downside risks if conflict in Gaza, Iran or the Lebanon front flares again. Kimhi of the Shoresh Institution also said the outlook depends heavily on the security situation, and that if the war can be ended and military spending reduced, the future could be bright.