Israel Risks Confusing Economic Endurance with Success

The most misleading sentence about Israel’s economy is also the most common one: Israel is resilient. It is true, but incomplete. Israel’s economy has survived nearly three years of war with a degree of flexibility that many countries would envy. The shekel has strengthened, and the stock market has remained buoyant. Credit-rating agencies have not abandoned Israel’s investment-grade standing. But resilience can also mean the ability of an economy to absorb repeated shocks while quietly accumulating structural damage. This is the paradox of Israel’s wartime economy. It is adapting, but the price of adaptation is rising.

Since October 2023, Israel has moved from one economic emergency to another: the Gaza war, the northern front with Hezbollah, repeated mobilization of reservists, and then direct confrontation with Iran. Each phase has been treated as exceptional, yet taken together, they look like a new macroeconomic condition of an economy organized around permanent insecurity.

The first layer of damage is visible in growth. Israel entered 2026 expecting a strong rebound after the October 2025 Gaza ceasefire. The Bank of Israel’s January forecast assumed that relative calm would allow reservists to return to work, and growth to reach above 5 percent. That optimistic scenario was halted. After the U.S.-Israeli strikes on Iran in late February and the subsequent missile exchanges, the economy contracted in the first quarter. This contraction revealed how narrow Israel’s recovery path has become.

War has changed the Israeli budget into a security shock absorber. In March, the Israeli cabinet approved a revised 2026 budget that increased defense spending by NIS 32 billion, bringing defense allocations to about NIS 143 billion, while raising the deficit target from 3.9 percent to 5.1 percent of GDP. Civilian spending was cut by 3 percent to partially offset the additional military burden.

The Knesset later approved the budget at the end of March, with the additional defense allocation reflecting the costs of Israel’s conflicts with Iran and Hezbollah and that the war was costing Israel roughly $1.6 billion per week. This is the beginning of a familiar wartime trade-off. The Bank of Israel warned that war-related spending required “careful fiscal management” and should be focused on necessities rather than programs that do not support long-term growth.

Israel’s war economy is also a story of missing workers. The Bank of Israel’s 2025 annual report identified the labor-supply constraint as one of the war economy’s central problems, driven largely by the high share of reservists and the absence of Palestinian workers. This produced an unusually tight labor market, low unemployment, high vacancies and fast wage growth in the business sector.

Reservists removed from their civilian jobs therefore impose a hidden tax on the private sector. They reduce available labor even when headline unemployment remains low. The wounded and traumatized may stay out of the labor market for long periods, deepening the same supply constraint.

Palestinian labor, once central to construction and agriculture, has been restricted since October 2023. In 2024, the loss of Palestinian construction workers had left about 40 percent of construction activity shut down, with the Bank of Israel warning that this could drag overall economic growth down by 2–3 percent depending on how quickly foreign workers arrived.

Israel tried to compensate by bringing in foreign workers. Reuters reported plans to bring in 65,000 construction workers from India, Sri Lanka and Uzbekistan, but the replacement process was slow and costly.

Israel’s economic model depends on a sharp divide between a globally competitive high-tech sector and weaker domestic sectors. The OECD describes Israel as a “dual” economy, with a highly productive high-tech sector existing alongside traditional, lower-productivity sectors that employ most of the workforce.

The war has made that divide wider. High-tech continued to attract foreign capital and sell cybersecurity and defense-adjacent services. Israeli tech companies raised $11.9 billion in the first nine months of 2025, up 13 percent year-on-year, with cybersecurity leading the sector and M&A reaching a record $71 billion, driven by major acquisitions such as Wiz and CyberArk. Glilot Capital raised $500 million for AI and cybersecurity funds, mostly from U.S. and European institutional investors, despite international criticism of Israel’s conduct in Gaza. Defense-adjacent firms have also benefited from wartime demand. Elbit Systems saw growing global interest in Israeli military technologies, particularly from Europe, the U.S., Asia-Pacific and the UAE.

On the other side, restaurants, hotels, farms, construction companies and local service providers have absorbed the war through wages, vacancies, insurance costs and lost customers. Israel’s tourism sector is not merely experiencing a bad cycle, but has been also structurally interrupted by the persistence of war. Israel’s problem is that normality has become episodic. Construction offers another example. Housing supply was already a political and economic pressure point before the war. A prolonged labor shortage makes it worse, while delayed projects feed housing inflation. In the long run, this affects not only affordability but also Israel’s ability to retain young skilled workers who can choose Berlin, London, New York or Lisbon over Tel Aviv.

The economic debate in Israel often treats international criticism as a diplomatic inconvenience, but that is too narrow. Reputation is now an economic variable. Universities, pension funds, cultural institutions, technology firms and European governments are all part of the ecosystem in which Israeli companies operate. A globally integrated economy cannot fully ignore condemnation. Israel’s defense technology is still booming, but the risk is accumulating. The war makes Israel a more complicated place to invest in, partner with or publicly defend.

Israel is discovering that a country can win market confidence and still lose economic normality. This is why the language of resilience is insufficient. Resilience describes the capacity to endure pressure, but it does not answer the political question of why the pressure continues, who benefits from it, and what is sacrificed to sustain it.

Every additional front converts part of Israel’s future into present military expenditure. The economic cost of the war is therefore not only measured in shekels, but in the narrowing of Israel’s strategic imagination. A country that once sold itself as a start-up nation increasingly behaves like a fortress economy with a venture-capital wing. That model can survive, but it eventually begins to confuse endurance with success.