After three years of Israel’s multi-front war in the Middle East, it would be no surprise if this month’s Knesset elections were taking place against the backdrop of an economy in dire straits.
Instead, Israel’s economy is – by many measures – flourishing.
After slowing sharply in the initial aftermath of the Hamas-led October 7, 2023 attacks and Israel’s genocidal war on Gaza, Israel has rebounded to become one of the fastest-growing advanced economies in recent years.
Gross domestic product (GDP) grew 2.9 percent in 2025, picking up from a 1 percent expansion in 2024, and 3.2 percent in the first half of this year, according to government figures.
The Bank of Israel has forecast 4 percent growth for the whole of 2026 and 5.5 percent growth in 2027 – projections that far exceed the outlooks for major economies such as the United States, United Kingdom, France, Canada, and Japan.
Over the past three years, the shekel has strengthened against the US dollar, hitting a three-decade high in May, and Israel’s stock market has surged, with the benchmark TA-125 up more than 110 percent.
Meanwhile, unemployment stands at 2.8 percent, while inflation is modest at 1.5 percent.
Against this relatively rosy economic backdrop, campaigning for the October 27 election has been dominated by national security, with Prime Minister Benjamin Netanyahu, leader of the right-wing Likud party, and retired general Gadi Eisenkot, head of the centrist Yashar, each claiming to be most qualified to keep Israelis safe.
Driving Israel’s striking economic resilience has been a booming tech sector largely insulated from its conflicts spanning Gaza, Lebanon, Syria, Iraq, Iran and Yemen.
Despite being on a war footing since October 2023, Israel has attracted record levels of investment in tech, the driver of about one-fifth of economic activity, amid the frenetic global rollout of artificial intelligence (AI).
Total direct foreign investment hit a record $26.2bn last year, up 78 percent from 2024, led by US tech giants Alphabet and Palo Alto Networks’ record-breaking acquisitions of Israeli cybersecurity firms Wiz and CyberArk, respectively.
Foreign capital has continued to flood into the country this year, with inflows reaching a quarterly record of $14.1bn in the January-March period, according to government figures.
Along with prospering from the global AI boom, Israel’s tech scene has benefitted from its close ties to the local defence sector, which has ramped up orders from hundreds of startups supplying everything from radar systems to communications platforms and anti-drone technology.
While Israel’s economy has bounced back in part due to robust employment and wage growth, its resilience is primarily an “export-driven story that reflects strong global technology demand, particularly in areas where Israel – and multinational firms operating from Israel – is globally competitive, such as cybersecurity and artificial intelligence,” said Keren Uziyel, a senior analyst for the Middle East and Africa at the Economist Intelligence Unit (EIU).
“Interest in Israel’s technology goods and services is driving high levels of FDI and venture capital fundraising, and boosting the capital markets, which in turn is having significant wealth effects and boosting government revenue,” Uziyel told Al Jazeera.
But Israel’s military campaigns have come at an enormous cost to the public purse.
In March, the Bank of Israel estimated that Israel’s war costs to date had reached approximately 350 billion shekels ($114.6bn) – a figure not including the then recently-launched Iran war.
Military expenditures are on track to rise substantially in the coming years as Israeli leaders double down on “national security”.
Netanyahu, whose right-wing coalition has cast security as “the foundation of everything else”, has pushed to raise the annual defence budget to 183 billion shekels ($60bn), equivalent to roughly 9 percent of GDP.
If passed, the budget would raise military spending by two and a half times what it was before October 7.
Outgoing opposition leader Yair Lapid has backed an expanded defence budget, but has clashed with Netanyahu about how to fund it.
Economic concerns
Though security has dominated the run-up to the election, opinion polling suggests that Israelis also view the economy as a key concern.
In an opinion poll released by the Israel Democracy Institute last month, 38 percent of Jewish Israelis and 46 percent of Palestinian citizens of Israel – who make up about 20 percent of the population – chose the economy and the cost of living as the most important or second-most important election issue.
Israel’s high cost of living, in particular, has long been a
Israel has for years ranked among the most expensive countries in the Organisation for Economic Co-operation and Development (OECD), a dynamic economists attribute to the country’s limited trade relations with its neighbours and cumbersome regulations.
Though Israel’s overall rate of inflation has been modest, food prices have risen at a faster pace, increasing 8 percent between the start of 2024 and mid-2026, according to consumer advocacy group Lobby 99.
“People are worried about the economy but not so much about the macroeconomic situation, more so on their personal perspectives, especially cost of living,” Ayal Kimhi, vice president of the Shoresh Institution for Socioeconomic Research in Tel Aviv, told Al Jazeera.
“However, the security situation dominates the public discourse for obvious reasons, so I do not think the economy will play a major role in the vote,” Kimhi said.
“Some parties do not even bother presenting a vision or an agenda,” he added.
“Other parties do not differ much about economic issues.”
While Israel’s headline economic figures are impressive, they come with caveats attached.
Economists note that while Israel’s economy has grown much faster than its peers, GDP has been boosted in part by the country’s usually high population growth, which has averaged nearly 2 percent over the past decade.
Israel’s growth trajectory has also taken a hit despite the expansion, with the Bank of Israel estimating an accumulated loss of output through the end of 2025 equivalent to 8.6 percent of annual GDP.
Joseph Zeira, a professor of economics at the Hebrew University of Jerusalem, said the country’s economic performance has “not been great at all” considering that growth has consistently lagged the pre-conflict trend since late 2023.
“Actual living standards depend on the area,” Zeira told Al Jazeera, adding that Israelis are grappling with “higher prices, or rather lower real wages and incomes”, and deteriorating public services.
“The only improvement is some decline in housing prices due to a vast wave of construction in recent years,” he said.
Government debt
The long-term health of Israel’s public finances is another concern.
While Israel’s debt-to-GDP ratio of about 68 is far below that of peers such as the US, the UK, France, and Italy, the gap between government revenue and spending has grown rapidly over the past three years.
In its latest annual report, the Bank of Israel said it was “essential” for the government to “restore orderly budgetary processes” and implement “credible measures” to reduce the public debt.
Other long-term challenges include boosting labour participation among ultra-Orthodox Jewish men – whose refusal to do military service has become a major election issue – and Arab women (among Palestinian citizens of Israel), both of whom are employed at much lower rates than the general population.
“The cost of the military campaigns and mobilisation has severely strained public finances,” Omer Moav, a professor of economics at the University of Warwick and at Reichman University, told Al Jazeera.
“Deficits and national debt have expanded significantly, making current spending trajectories unsustainable without fiscal consolidation,” Moav said.
“The next government is facing a huge challenge.”
Regardless of who prevails in the election, economists say, Israel’s economic prospects will in large part hinge on whether conflict in the region escalates or subsides.
“We expect growth to reach around 4 percent in 2026 and to exceed this level in 2027,” said Uziyel, the EIU analyst.
“However, significant downside risks to growth remain should conflicts in Gaza, Iran, or on the Lebanon front resume.”
“The outlook depends greatly on the security situation,” said Kimhi of the Shoresh Institution for Socioeconomic Research.
“If we are able to put an end to the war and reduce military spending, the future could be bright.”
Source: www.aljazeera.com
