Israel's economy presents a genuinely unusual case: a country fighting wars on multiple fronts simultaneously posting growth figures that outstrip every G7 peer. GDP expanded 3.2 percent in the first half of 2026, the shekel hit a three-decade high against the dollar in May, and the TA-125 stock index has surged more than 110 percent since October 2023. Unemployment sits at 2.8 percent, inflation at 1.5 percent. On paper, this is an economy that has shrugged off geopolitical catastrophe. The engine is overwhelmingly tech, and specifically AI-adjacent cybersecurity. Foreign direct investment hit a record $26.2 billion in 2025 — up 78 percent from the prior year — driven by Alphabet's acquisition of Wiz and Palo Alto Networks' purchase of CyberArk. First-quarter 2026 inflows reached a quarterly record of $14.1 billion. This is not broad-based industrial growth; it is a concentrated capital flood into a single sector that accounts for roughly one-fifth of economic activity and whose workforce is largely insulated from military mobilisation. The defence-tech feedback loop deepens this concentration. Hundreds of startups supplying radar, communications, and anti-drone systems have seen surging orders from the military, creating a wartime demand cycle that funnels innovation and capital into security applications. The dynamic is generative in narrow terms — real products, real exports, real revenue — but it tightens the economy's dependence on a single cluster whose fortunes are tied to both global AI demand and regional instability. The fiscal picture tells a different story. The Bank of Israel estimates cumulative war costs at approximately 350 billion shekels ($114.6 billion), excluding the Iran campaign. Netanyahu is pushing to raise the annual defence budget to 183 billion shekels ($60 billion), roughly 9 percent of GDP — two and a half times the pre-October 7 level. The debt-to-GDP ratio of 68 percent is manageable by international standards, but the deficit trajectory has steepened sharply, and the central bank has described restoring fiscal discipline as "essential." The lived experience diverges from the macro headlines. Food prices have risen 8 percent since early 2024. Economist Joseph Zeira of Hebrew University notes that growth has consistently lagged the pre-conflict trend, with the Bank of Israel estimating accumulated output losses of 8.6 percent of annual GDP through end-2025. Real wages and public services have deteriorated. The high population growth rate — nearly 2 percent annually — flatters aggregate GDP while masking per-capita stagnation. Structural labour market distortions compound the problem. Ultra-Orthodox Jewish men and Arab women among Palestinian citizens of Israel participate in the workforce at far lower rates than the general population, constraining productive capacity. Military service exemptions for the ultra-Orthodox have become a flashpoint in the election campaign, illustrating how demographic and security politics intertwine with economic capacity. The October 27 Knesset election will determine who inherits this contradictory picture. Both Netanyahu and challenger Gadi Eisenkot have centred campaigns on security credentials, with economic platforms receiving scant attention. Polling shows 38 percent of Jewish Israelis and 46 percent of Palestinian citizens of Israel rank cost of living as a top-two issue, yet as analyst Ayal Kimhi observes, security dominates public discourse so thoroughly that some parties have not bothered presenting an economic agenda. The EIU forecasts 4 percent growth in 2026 and 5.5 percent in 2027, but attaches significant downside risk to any resumption of hostilities in Gaza, Lebanon, or Iran. The central question is whether a tech sector that thrives during wartime can generate enough surplus to cover a defence budget that may consume 9 percent of GDP indefinitely.
