Israel’s economy prospers despite years of war, but prices worry voters

War can weaken some parts of an economy without stopping all economic activity. Israel’s technology industry remained relatively insulated from fighting and continued selling products and services worldwide. That export income supported growth even as military costs rose sharply.

Technology drives about one-fifth of Israel’s economic activity. Global demand for artificial intelligence and cybersecurity helped attract investment, while defence orders supported startups making radar, communications platforms, and anti-drone systems. Robust employment and wage growth also kept household income and spending moving.

The result was a rapid rebound after the initial slowdown following October 7, 2023. GDP grew 1 percent in 2024, 2.9 percent in 2025, and 3.2 percent in the first half of 2026. The Bank of Israel forecasts 4 percent growth in 2026 and 5.5 percent in 2027, though rising defence costs and household price pressures remain serious concerns.

Several indicators show an economy performing strongly despite the war. GDP expanded by 1 percent in 2024, then accelerated to 2.9 percent in 2025 and 3.2 percent during the first half of 2026. These figures point to a sharp recovery after the initial post-attack slowdown.

The labour market also appears resilient. Unemployment stands at 2.8 percent, while inflation is reported at 1.5 percent. The shekel strengthened against the US dollar over three years and reached a three-decade high in May. These figures suggest strong demand for Israeli assets and continued economic confidence.

The stock market provides another striking measure. The benchmark TA-125 index has surged by more than 110 percent. The Bank of Israel expects GDP growth of 4 percent for all of 2026 and 5.5 percent in 2027, although these national gains coexist with high living costs and rising public debt.

Israel’s technology sector attracts foreign investment because it competes successfully in fields with strong worldwide demand. The article identifies cybersecurity and artificial intelligence as especially important. These industries can sell products and services internationally, making them less dependent on local consumer demand or uninterrupted domestic conditions.

Technology accounts for about one-fifth of economic activity. Foreign direct investment reached a record $26.2bn last year, up 78 percent from 2024. Alphabet and Palo Alto Networks made record acquisitions of Israeli cybersecurity companies Wiz and CyberArk. Investment inflows then reached a quarterly record of $14.1bn in January-March this year.

The sector also benefits from close ties with Israel’s defence industry. Military orders have expanded for startups producing radar systems, communications platforms, and anti-drone technology. The combination of global AI demand, defence contracts, venture funding, and acquisitions has helped the sector remain resilient during the war.

Foreign direct investment, or FDI, is investment by a foreign company or investor in businesses or productive assets in another country. Venture capital is funding from investors for young companies with high growth potential, often technology startups. FDI can bring capital, expertise, and market connections, while venture capital helps firms develop before they earn steady profits.

In Israel, these funds support a technology sector responsible for about one-fifth of economic activity. Foreign companies acquired Israeli cybersecurity firms Wiz and CyberArk, helping drive last year’s record $26.2bn in direct foreign investment. Venture funding also helps startups build products such as artificial-intelligence tools, radar systems, and anti-drone technology.

The growth mechanism is cumulative. New funding allows companies to hire workers, develop technology, and sell abroad. Successful firms can attract further investment and acquisitions, boosting capital markets, government revenue, and economic activity. The article links this cycle to high global demand for Israeli technology during the war.

By March, the Bank of Israel estimated that Israel’s war costs had reached approximately 350 billion shekels, equal to $114.6bn. That estimate did not include the recently launched Iran war. The figure shows how military campaigns can impose a large burden even while national output is growing.

Military spending is expected to rise further. Netanyahu has proposed an annual defence budget of 183 billion shekels, about 9 percent of GDP. If approved, that would be two and a half times the level before October 7. The government must fund this spending through revenue, borrowing, or reductions elsewhere.

Higher defence spending can therefore strain public finances. It may increase debt and interest costs, while leaving less room for social programmes, infrastructure, or other priorities. The article notes that military spending is on track to rise substantially, and that Yair Lapid supports expansion but disputes how it should be funded.

Inflation measures the average change in prices across a broad basket of goods and services. A reported rate of 1.5 percent can therefore hide sharp increases in particular categories. Food prices may rise significantly even when cheaper goods, services, or lower price increases elsewhere keep the overall average modest.

For example, if food becomes more expensive while some other prices remain flat or fall, the combined inflation rate may stay low. Households do not experience the official average equally. Families that spend a large share of their income on groceries feel food inflation more strongly than people whose spending is concentrated elsewhere.

That helps explain why Israel can show modest inflation alongside public anger about living costs. The article identifies rising food costs as a concern and says the economy and cost of living were among the most important election issues for many Jewish Israelis and Palestinian citizens of Israel. National averages can look healthy while essentials strain household budgets.

Gross domestic product, or GDP, measures the value of goods and services produced within an economy over a period. GDP growth means total economic output is increasing. It is useful for judging the economy’s overall direction, but it does not show how gains are distributed among people or which prices households face.

Israel’s GDP grew 2.9 percent in 2025, after expanding 1 percent in 2024. Technology exports, foreign investment, strong employment, wage growth, and rising capital markets helped drive the recovery. These gains can raise national income and government revenue without reaching every household equally.

Ordinary people may still feel pressure when food prices rise, military spending increases, or public debt grows. The article reports unemployment at 2.8 percent and inflation at 1.5 percent, yet says the cost of living remains a major concern. Strong national statistics and household financial stress can therefore exist at the same time.