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). 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.
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