The war in Iran has unleashed the biggest price shock on the global economy since Russia’s full-scale invasion of Ukraine.
But in Israel, which launched the war on February 28 alongside the US, restaurants are full, the shekel has rallied and inflation has fallen since the fighting began.
Despite undergoing the longest period of fighting in the country’s history, during which Israel has exchanged bouts of rocket and drone fire with foes from Gaza to Iran, its economy has proven remarkably resilient. There have been three quarterly contractions during nearly three years of conflict, but growth has rebounded each time.
“There must be a trampoline under the Holy Land,” Israel’s central bank chief, Amir Yaron, told a recent conference, pointing to a chart that showed growth rates yo-yoing sharply in the lulls between full-fledged combat and shaky ceasefires.
“Once the missiles and fighting end, you see how the Israeli public goes back to restaurants, goes back to activity,” he said. “This normalisation — entering [bomb] shelters for 15 minutes and then returning to work is adaptation.”
The latest GDP drop came in the first quarter of 2026, with the economy shrinking at an annualised rate of 3.3 per cent. But the OECD this month forecast that Israel’s economy will “rebound strongly” to grow 3.3 per cent in 2026 and 5.6 per cent in 2027. It sees inflation slowing from 3 per cent last year to 2.3 per cent in 2026.
The surprising resilience has been underpinned by a formidable military-industrial complex, a flexible workforce, a large natural gas supply — and two decades of growth that turned Israel into a relatively wealthy, if unequal, nation.
“Israel entered this period with very low public debt, very high private savings and with a budget that was almost balanced,” said Victor Bahar, chief economist at Bank Hapoalim, one of Israel’s biggest banks.
He said this allowed the government to say: “We’ll do whatever it takes to support companies and households, and keep consumers’ heads above the water.”
Buoyed by US support, the military has shielded most of Israel’s key infrastructure from Iranian missiles, while demand has boomed for Israeli weapons, such as its vaunted aerial defence systems and long-range missiles.
The shekel’s appreciation has absorbed some — but not all — of the oil price shocks resulting from the closure of the Strait of Hormuz, while its Leviathan offshore gasfield helped keep electricity prices stable.
And Israel has become adept at sending its population to work one week and war the next, with its high-tech workers able to work from home when the country was shut down in periods of active combat.
To Israel’s critics, these are the markers of a martial nation, streamlined for unending conflict with neighbours, gaining an edge from its sophisticated tech sector and regionally unrivalled air force. The price has been increasing diplomatic isolation, as Prime Minister Benjamin Netanyahu acknowledged last year, when he said Israel would need to become a “super-Sparta” to compensate.
But Israel’s wars have not come cheap. Nearly three years of conflict since Hamas’s cross-border raid on October 7 2023 — which killed almost 1,200 Israelis — have cost about Shk400bn ($139bn) in extra spending, according to the central bank.
Growth has also slowed over that period. The Bank of Israel estimated earlier this year that the resulting loss in economic output was worth Shk175bn — or about 8.5 per cent of annual GDP. A study by The Israel Democracy Institute this week found almost a third of respondents reported lower wages or business income than before the war.
Another long-term cost is manpower. At least 100,000 Israelis have left the country since October 7, mostly high-tech workers, medical professionals and engineers, according to a study by Tel Aviv University.
The Israel Defense Forces have also called up hundreds of thousands of reservists for offensives in Gaza and Lebanon, and are keeping tens of thousands on active duty.
The chief executive of a 300-employee cyber security company said that at times more than half its employees have been called up. “We’ve delayed two separate equity sales because we can’t meet the revenue targets we had set at the beginning,” they said.
Israel has also cancelled the work and entry permits of hundreds of thousands of Palestinians in low-skilled jobs. It has replaced them, to some extent, with foreign labourers, especially from India, Thailand and the Philippines.
But the country’s relative economic stability has continued to attract investors chasing higher yields. The stock market’s blue-chip index has surged to record highs. And when Bank Hapoalim was trying to raise debt last year, investors in London clamoured for its riskier, high-yielding contingent convertible bonds, said Bahar.
“They even told us, ‘You know what, we want to be fully exposed to the Israeli economy — we want to be fully exposed to your bank.’” Bahar said the investors had added: “We prefer them over straight bonds that, from our point of view, carry almost no risk.”
Markets have also continued to snap up Israel’s government bonds, despite downgrades from several credit agencies as growth forecasts were slashed — albeit at higher spreads than before the war.
But while the borrowing has allowed Israel to take steps to mitigate the impact of the war, it has also pushed national debt from 60 per cent of GDP to close to 70 per cent. Economists warn this will be a drag on the economy.
“In real time [Israelis] didn’t see the damage of the campaign,” said Bahar. “But they will feel it in the future because they have to service the debt and pay more taxes.”
And politics could yet diminish investor interest in Israel.
The country is yet to face a long-feared broad international boycott of its goods and companies over the military’s actions in Gaza, where it has killed at least 72,000 Palestinians and corralled survivors into less than half of the shattered enclave’s territory.
This could yet change, with European trading partners increasingly frustrated with “Netanyahu’s military belligerence”, warned Eran Yashiv, a professor of economics at Tel Aviv University.
Netanyahu has dismissed such fears, saying Israel will find new trading partners by turning east towards countries such as India and the UAE, where deepening security ties are expected to lead to greater trade.
But that was unlikely to happen quickly enough, if at all, warned Yashiv.
“This military belligerence is not accidental, and was not forced upon [Netanyahu] by these attacks — it’s a decision that that’s how he can survive politically,” he said. “And if Israel’s political and military belligerence continues, the Europeans may in fact do more sanctions . . . and the Israeli economy will suffer because of that.”
Additional reporting by Sam Fleming in London and data visualisation by Keith Fray
