Despite three years of intense conflict in the Middle East, Israel’s economy has shown remarkable resilience, outperforming many of its global peers. The country’s GDP grew by 2.9% in 2025, following a 1% expansion in 2024, and is projected to reach 4% for 2026 and 5.5% in 2027, according to the Bank of Israel. The shekel hit a three-decade high against the US dollar in May, while the stock market surged, with the benchmark TA-125 index rising over 110%. Unemployment remains low at 2.8%, and inflation is modest at 1.5%.
The tech sector has been a key driver of this growth, attracting record levels of foreign investment despite ongoing conflicts. Total direct foreign investment reached $26.2bn in 2025, up 78% from the previous year, with major acquisitions by US tech giants like Alphabet and Palo Alto Networks. The sector’s close ties to the defense industry have also boosted growth, as startups supply critical technology for military operations.
However, the economic success comes at a cost. Military expenditures have soared, with war-related spending estimated at 350 billion shekels ($114.6bn) by March 2026. Prime Minister Benjamin Netanyahu has proposed raising the defense budget to 183 billion shekels ($60bn) annually, a significant increase from pre-conflict levels. While security dominates the political discourse ahead of the October 27 election, economic concerns, particularly the high cost of living, remain a top issue for voters.
Economists note that the strong economic figures come with caveats. GDP growth has been partly driven by high population growth, and the Bank of Israel estimates an accumulated loss of output equivalent to 8.6% of annual GDP by the end of 2025. Additionally, government debt has risen rapidly, prompting calls for budgetary reforms to ensure long-term fiscal health. Despite these challenges, Israel’s economy continues to thrive, supported by robust tech investment and global demand for its innovations.