Israel’s longest and most expensive war was predicted to break its economy. The opposite has happened. After 28 months of conflict, the Jewish state has emerged from the war not only victorious on the battlefield, but economically strengthened as well.
Israeli authorities estimate that the total cost of the war will be around 250 billion NIS (£60m), pushing the country’s external debt from roughly 60% to about 70% – still a figure the peacetime economies of the UK and the euro zone could only dream of. Remarkably, Israel’s GDP has grown from $525 billion in 2022 to a projected $650 billion this year, and its GDP per capita has now surpassed that of Germany, not to speak of the UK, France, Canada, Italy, Japan and the EU average.
Elevated levels of military exports are likely to be the most direct economic boon from the war. While Russia slogs it out in World War I-style warfare in eastern Ukraine, depleting its Cold War stockpiles, Israel has demonstrated its home-grown technology in real combat conditions and under the scrutiny of the entire world. The forensic, blow-by-blow magnification of the Gaza war – and its side theatres in Lebanon, Yemen, and Iran – was meant to harm Israel. Instead, making this war the dominant global news story for nearly two years was always going to benefit the reputation of Israel’s defence industry. And so it has proved: Israeli defense exports hit a record $15 billion in 2024, marking a fourth consecutive year of growth. The $3.1 billion Arrow 3 missile sale to Germany was the standout deal. Even countries like Spain, which claim to want to boycott Israel, are discovering that this is all but impossible in a fast-changing and increasingly dangerous world where Israeli weapons systems dominate the world in many areas.
In tandem, having internalised the risks of dependence on foreign weapons supplies during wartime, the Israeli government has implemented a programme to dramatically ramp up domestic weapons production and stockpile levels. This will allow Israel to become a major exporter of basic military equipment within a few years. Military hardware is, unfortunately, now a global growth industry. Russia – once a dominant exporter – is instead importing weapons, while the catastrophic performance of its equipment in Ukraine will remain a marketing disaster for decades to come.
This opens a large opportunity for Israel to supply former Russian clients in Africa and Asia, India in particular. Such exports would not only be an economic boon and guarantee Israel’s strategic independence, but would also broaden its alliance network.
One of the main drivers of Israel’s long-term growth miracle is its steady birthrate – something unique among OECD countries. The looming crisis facing developed nations over the coming generation is likely to stem less from climate change than from population decline and collapsing workforce participation, as dependency ratios rise beyond sustainable levels. Israel alone among developed nations will largely avoid this trap, with its population and workforce continuing to grow by about 2% per year.
Israel’s steady growth has been rewarded by a strengthening currency. The shekel has appreciated by roughly 25 per cent against the dollar since the start of the war and is likely to fall below the three NIS-to-the-dollar mark for the first time since 1994 in the near future.
For two decades, the Bank of Israel consistently intervened to suppress the shekel’s strength to protect exporters, building up a massive foreign-exchange reserve fund of nearly a quarter-trillion dollars in the process. At roughly $24,000 per capita, only Switzerland, Singapore, Hong Kong, and Taiwan maintain comparable buffers. However, the signs suggest that Israel will no longer accumulate foreign currency to weaken the shekel and will instead allow it to strengthen in line with relative economic performance. Israel’s most important exports are highly value-added and therefore less sensitive to currency fluctuations than raw materials. Continued appreciation would be a boon for Israeli consumers, making imports and foreign travel increasingly affordable.
In the lead-up to the war and its early months, dark rumours circulated about the imminent collapse of Israel’s high-tech sector, which accounts for roughly 20% of GDP and more than half of exports. These fears have proven unfounded. On the contrary, growth accelerated throughout the conflict, with cybersecurity and fintech emerging as standout sectors.
Alongside its high-tech expansion, Israel is finally achieving energy independence. It is now largely self-sufficient in natural gas, which generates over 90% of its electricity, replacing coal. Israel exports gas to Jordan and Egypt – an arrangement that is not only economically beneficial but strategically significant. It is difficult to go to war with a neighbour who can shut down your power supply overnight.
Pipeline projects linking Israel to Cyprus and Greece, and onward to Europe, are once again under discussion after being paused during the war. There is also the tantalising prospect of Israel and Lebanon cooperating on shared gas fields – an outcome that could lift Lebanon out of grinding poverty, contingent on Hezbollah’s demilitarisation.
Israel is also moving into advanced semiconductor manufacturing, breaking ground on a major new facility in Ashkelon. The project has the potential to secure Israel’s position as a critical node in the global semiconductor supply chain.
Israel also continues to strengthen its water self-sufficiency. A recently completed project now allows controlled backflow into the Sea of Galilee, ensuring long-term water stability without the aquifer depletion and environmental damage seen elsewhere in the region. This represents a complete reversal from the situation two decades ago, when Israel stood perpetually on the brink of water crisis. Agriculture remains the main strategic vulnerability: Israel produces only about 50% of the calories it consumes. While it could expand food production using treated wastewater, desert land, and domestic phosphate reserves, such efforts would likely be economically inefficient, as Saudi Arabia discovered.
One of the Israeli economy’s principal weaknesses is the squeezed middle class. Sandwiched between the grey and black economies that are difficult to tax, a Haredi population that is a substantial net drain on public finances, and a dense web of production, import, distribution, and retail oligopolies, the median Israeli’s quality of life falls well short of what headline GDP figures would suggest. Despite GDP per capita exceeding Germany’s, the average Israeli household devotes a far higher share of income to basic necessities such as food and clothing.
Much of the retail economy is controlled by a patchwork of entrenched consortia, benefiting a small elite. This system is upheld less by tariffs, which are generally modest, than by regulatory barriers that make parallel imports difficult or impossible.
Any attempt to open Israel’s consumer market to direct foreign competition is fiercely resisted by well-funded lobbyists, while mainstream media – largely dependent on advertising revenue from these conglomerates – tread carefully. This distortion will remain a persistent drag on the broader economy.
Another pressure point is real estate, also of particular interest to diaspora Jews. Prices have remained broadly stable in shekel terms over the past three years. The average home price has risen from 2.1 million NIS to 2.35 million NIS – an 11 per cent increase. Trends vary by city: ultra-prime Tel Aviv has been flat or slightly down at the top end, while Jerusalem prices surged 22%, from 2.8 million NIS to 3.4 million NIS, narrowing the gap between the capital and Israel’s wealthiest city to just 20%. Modi’in and Beit Shemesh remained flat, while Anglo hubs such as Netanya saw sharper increases, with average prices rising roughly 20%, from 2.5 million NIS to 3.1 million NIS.
High interest rates have limited further price growth. But given the population growth, constrained construction starts, high developer borrowing costs, and labour shortages, pent-up demand is likely to push prices higher once rates fall further. For foreign buyers, however, a seemingly stable market has become significantly more expensive due to currency appreciation.
Overall, the outlook for Israel’s economy is striking. The war that conventional wisdom predicted would weaken the Jewish state has instead hardened it – militarily indispensable, economically adaptive, and demographically unlike any other developed nation. Israel enters the next decade not diminished, but more structurally resilient than before October 7.
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