Israel’s economy has remained more resilient than expected despite nearly three years of war and ongoing regional instability, but economists warn the strength seen in headline data masks deeper structural challenges that could shape the country’s long-term outlook.
According to Dr. Tomer Fadlon of Tel Aviv University and the Institute for National Security Studies (INSS), the economy has performed better than anticipated under wartime conditions, even if it has not returned to pre-war growth trajectories. “It’s been stronger than expected given the circumstances,” he said, noting that performance still falls short of pre-war forecasts.
Dr. Tomer Fadlon and Prof. Itai Ater interview with ynet
(Video: Miki Schmidt)
Part of that resilience stems from increased government spending. Military expenditures have risen significantly, while compensation to reservists and wartime fiscal measures have helped sustain domestic demand. These factors have provided short-term support to economic activity during a prolonged period of uncertainty.
At the same time, Israel’s high-tech sector continues to play a dominant role. Now accounting for roughly 57% of exports, the industry remains the central engine of growth, maintaining strong global demand and insulating the broader economy from sharper decline.
Prof. Itai Ater of Tel Aviv University said this sectoral strength has been critical in maintaining stability. “The tech sector is able to deliver what is expected from the world,” he said, describing it as a key pillar supporting the economy during the conflict.
Yet beneath that stability, macroeconomic indicators point to growing strain. Israel’s credit rating has declined, national debt has increased, and GDP per capita has stagnated. “Many macro indicators don’t look good,” Ater said, warning that the current trajectory raises concerns about long-term sustainability.
Economists also point to a widening disconnect between macroeconomic data and the lived experience of many Israelis. While headline figures such as GDP may appear relatively stable, high living costs significantly reduce purchasing power. “When you look at purchasing power, the situation is not as good,” Fadlon said.
Ongoing disruptions tied to the war continue to weigh on the economy. Labor shortages, supply chain interruptions and prolonged uncertainty have affected businesses across multiple sectors. These pressures are not evenly distributed, creating a more fragmented economic reality.
The benefits of resilience are concentrated in specific segments of the workforce. Employees in high-tech, estimated at about 15% to 16% of the labor market, continue to see relative stability and even growth. In contrast, other sectors are facing increasing financial strain, with rising business closures and weaker performance among smaller firms.
Market indicators further highlight this imbalance. While the stock market has shown gains, it primarily reflects the performance of larger companies and does not capture the growing number of bankruptcies since the war began. “The stock market is on the rise, but it doesn’t capture bankruptcies,” Fadlon said.
Beyond economic data, broader measures of well-being suggest additional challenges. The prolonged security situation, extended reserve duty and rising violence have contributed to a sense of instability that economic indicators alone cannot explain. “The well-being of people is not only about economic indicators,” Ater said.
Looking ahead, economists emphasize that government policy will play a decisive role in shaping outcomes. Investment in education, infrastructure and transportation is seen as essential to sustaining growth, alongside the need for stable and effective governance. “Without a functioning government, it will be very difficult to sustain growth and prosperity,” Ater said.
Without these structural improvements, the ability of the economy to maintain momentum could weaken, particularly as existing pressures accumulate.
Another emerging concern is the movement of people. While immigration to Israel continues, partly driven by rising antisemitism abroad, there has also been a noticeable increase in Israelis leaving the country in recent years.
Human capital has long been considered one of Israel’s greatest economic assets. Economists warn that continued outflow, particularly of highly skilled individuals, could have lasting consequences for key sectors. “Israel’s greatest asset is its human capital,” Fadlon said, cautioning that prolonged conflict risks accelerating its erosion.
Data from recent years points to a significant shift. Approximately 100,000 Israelis left the country in 2023 and 2024, including professionals such as physicians, engineers and academics. “This is a huge concern,” Ater said, warning of a growing brain drain that could undermine the foundations of Israel’s economy.
This emerging trend, often described as a “brain drain,” is viewed as a major risk to long-term economic stability. If it continues, it could undermine the very sectors that have helped sustain the economy during the war.
For now, Israel’s economy continues to demonstrate resilience under pressure. But as the conflict endures and structural challenges deepen, economists warn that the coming years will be critical in determining whether that resilience can be sustained, or begins to erode.