Israel's Economy Shows Resilience Amidst War, But Future Challenges Loom

Israel's economy has demonstrated remarkable resilience since the October 7th attacks, bolstered by its inherent strengths and significant financial support and easing measures from the Bank of Israel and the government. However, underlying structural weaknesses persist, and experts warn that a lack of responsible fiscal management could erode the nation's buffer against future shocks. While the stock market's growth and a strong shekel are seen by many as indicators of economic robustness during the prolonged and costly war, the macroeconomic picture is more complex, with the economy having suffered severe, ongoing damage.

Estimates for the war's cost vary. The Bank of Israel calculated the expenses up to April of the current year at 405 billion shekels, encompassing broader defense spending and interest costs. In contrast, the Ministry of Finance's Accountant General's office, focusing on direct war expenditures until the end of 2025, estimated the cost at 231 billion shekels. The Ministry of Defense anticipates requesting an additional 450 billion shekels from the next government to cover ongoing security needs.

The war has significantly altered the composition of Israel's GDP. Three years into the conflict, Israeli GDP in the past month was still 0.8% below its pre-war trend line, representing tens of billions of shekels in uninvested potential. The business sector, a more accurate measure of economic welfare, has seen an accumulated loss of 11% since the war's outset. Overall welfare loss, accounting for government spending that masked some GDP decline, is estimated at approximately 375 billion shekels by the end of last year, translating to a per capita loss of 35,000 shekels, largely financed through increased public debt.

Despite these impacts, the economy exhibits strengths: unemployment is relatively low, inflation is contained, the risk premium has decreased, GDP is recovering, the shekel is strong, and the stock market has hit record highs. Experts like former Bank of Israel official Michel Strawczynski and Alex Zvezdinsky of Meitav Investment House note that government spending, while costly, has stimulated demand and helped the economy weather the storm, a common response in wartime. The high savings rate of Israelis has also played a crucial role in maintaining private consumption.

Looking ahead, significant challenges remain. Experts warn against complacency, highlighting the need for responsible fiscal policy to manage the rising debt-to-GDP ratio, which could reach 81% by 2035 under certain scenarios. The reliance on the high-tech sector, particularly companies like Mellanox whose profits are registered in Israel but generated abroad, presents a potential risk. Future government policy must focus on sustainable growth, addressing the cost of living, and managing the consequences of credit rating downgrades and increased national debt, while also ensuring adequate civilian spending in areas like education and health.