For nearly two years, Israel has been fighting on multiple fronts. Gaza, Hezbollah, Iran, and, more recently, facing missile threats from Yemen.
Yet its economy has delivered some of the strongest stock market gains in the world, attracted billions in foreign investment, and kept its currency among the best performers globally.
Under the surface, however, the country’s fiscal deficit has widened sharply, daily war costs have reached staggering levels, and critical infrastructure has been hit.
The question now is whether this mix of resilience and strain is sustainable.
How much is the war really costing?
The June clash with Iran exposed the scale of Israel’s wartime burn rate.
Government and research estimates show the first week alone cost about $5 billion.
Daily spending reached roughly $ 725 million, of which about $593 million was for offensive operations and $132 million for defence and mobilisation.
Just keeping missile defences in the air has cost between $10 million and $200 million a day, according to the Wall Street Journal.
If the fighting had lasted a month, Israel could have spent over $12 billion. Broader direct and indirect costs have been estimated at up to $20 billion.
The mobilisation of about 450,000 reservists has also disrupted the labour force, with knock-on effects for agriculture, construction and consumer-facing services.
The fiscal impact is already visible. The deficit has pushed past 6% of GDP, and debt is near 70%.
The Finance Ministry has asked for an extra $857 million for defence, and at the same time cut $200 million from health, education and social services.
VAT has been raised from 17 to 18% this year, along with higher payroll deductions. Public-sector pay freezes are planned.
Markets are booming, for now
While the war with Iran grounded flights, shut down parts of Haifa’s port and damaged a major oil refinery, Israel’s financial markets have gone the other way.
The Tel Aviv Stock Exchange fell 23% after the October 2023 Hamas attack, but recovered within weeks and is now up about 80% in dollar terms since then.
From its wartime low, the index has risen more than 200%.
H1 2025 saw a 21.3% gain, outpacing most global markets. Insurance and financial stocks have surged 68%.
The shekel has gained roughly 10% against the US dollar over the past year and strengthened about 7% after the June ceasefire with Iran.
Foreign capital has been a big driver. By mid-July, overseas investors had bought 9.1 billion shekels ($2.7 billion) of Israeli shares in 2025.
The tech sector raised $9 billion in the first half, 54% more than in the previous six months.
Domestic investors, anchored by the country’s large pension and savings industry, have also provided steady demand.
The tech and defence engine
Technology and defence remain the backbone of Israel’s economic story. High-tech products and services make up about 20% of GDP and more than half of exports.
The sector employs 12% of the workforce yet contributes about a quarter of income tax receipts, thanks to higher wages.
Israel spends more than 6% of its GDP on research and development, the highest rate in the world and twice the global average.
About half of that R&D spending comes from foreign multinationals, many linked to defence.
The same firms that have helped build systems like Iron Dome also develop commercial applications in cybersecurity, AI and air-traffic control.
The June conflict acted as a live demonstration for Israel’s defence technology, leading to more interest from foreign buyers, including in Gulf markets.
Defence exports have become an important growth area even as tourism and parts of manufacturing struggle.
There are warning signs. Local high-tech employment fell in 2024 for the first time in a decade, and more Israeli tech workers are relocating abroad.
This is one of the few sectors where skills and companies can move quickly if conditions deteriorate.
Vulnerabilities in plain sight
The war has revealed how dependent Israel is on certain infrastructure and trade nodes.
When shipping giant Maersk suspended calls at Haifa during the Iran fighting, it effectively cut off the country’s main Mediterranean gateway for machinery, pharmaceuticals and other strategic imports.
Insurance premiums on vessels calling at Israel spiked above 1% of ship value.
The shutdown of Bazan, the largest oil refinery, cost about 3 million dollars a day.
The closure of Ben Gurion airport for regular traffic, which handles about 300 flights and 35,000 passengers a day, caused losses for airlines and tourism.
El Al alone faced about 6 million dollars in extra operational costs from diversions.
These disruptions were short-lived, but they show how quickly Israel’s economy could be squeezed if key ports, refineries or airports were offline for longer.
They also underline how quickly inflation could rise if shipping and energy costs surge.
The risk that changes everything
For now, the combination of a strong tech base, high domestic savings, and foreign investor appetite has allowed Israel to absorb the economic shock of short, intense wars.
OECD forecasts 4.9% growth in 2026, assuming no major escalation.
But the tolerance has limits. A prolonged confrontation with Iran, renewed multi-front fighting, or a serious maritime or energy disruption would force spending higher and strain market confidence.
Credit rating agencies already have Israel on a negative outlook after downgrades last year.
Rising debt and a persistent deficit leave less fiscal space to absorb another shock.
One risk sits outside the war zone. Diplomatic isolation is deepening, with more states moving to recognise Palestinian statehood and war crimes cases targeting Israeli soldiers.
The UN rapporteur for Palestine has named global companies allegedly profiting from the conflict.
If the European Union or other major partners imposed sanctions, the effect on Israel’s markets, investment flows, and trade would be immediate.
Two decades of economic gains could be at risk.
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