Israel's Economy Keeps Pushing Through Amidst Persistent Conflicts
Money, War, and Uncertainty: Israel's Struggling Economy
Conflict doesn't just bring destruction and heartbreak—it also carries a hefty financial toll. And Israel, engaged in battles on multiple fronts since October 2023, is learning this the hard way. From Gaza to Lebanon to deep within Iran, the Jewish state has been fighting relentlessly, leaving its economy reeling.
Israel's economy is facing a massive strain with reservists being called up to fight, forcing them away from their jobs. To make matters worse, work permits for many Palestinians have been cancelled, and crossing borders has become challenging, exacerbating the labor shortage. All these factors make filling job vacancies extremely difficult. In April, the unemployment rate stood at 3%, down from 4.8% in 2021.
Military spending in Israel has skyrocketed. According to the Stockholm International Peace Research Institute, military spending grew by 65% to reach $46.5 billion (€40.4 billion) in 2024, which represents 8.8% of the country's GDP—the second highest in the world after Ukraine.
Israel's 2025 budget aims to spend 756 billion Israeli shekels ($215 billion; €187 billion), a 21% increase over the previous year, making it the largest budget in Israeli history with $38.6 billion allocated for defense, according to The Times of Israel.
However, the burdensome costs are not just financial. Many Israelis have spent hundreds of days in reserve duty, and others have been evacuated from their homes near border regions, causing significant disruptions in their lives. Social services are under immense strain, and the uncertain future has left people anxious about the near and long-term implications.
Increased taxes were introduced to alleviate some of the financial pressure. The value-added tax (VAT) for most goods and services rose from 17% to 18% early in the year, and the health tax deducted from employee salaries and national insurance contributions went up as well.
Despite the challenges, some industries like high-tech, defense, and retail food have remained resilient, contributing to Israel's surprisingly robust economy in 2024, which topped both previous years with over $540 billion in revenue. The country has traditionally been known for its advanced high-tech industry, which employs 12% of the workforce and contributes around 25% of all income taxes, making up 64% of the country’s exports and around 20% of total GDP.
However, the number of high-tech employees has stagnated since 2022, according to a report from the Israel Innovation Authority. In 2024, the number of local high-tech employees decreased for the first time in a decade, while the number of employees leaving the country for long-term relocation increased.
As for investors, the risks have increased in the short term. But the real impact will hinge on how long the military conflicts last and how they end, said economics professor Itai Ater of Tel Aviv University. Warring scenarios, like a lengthy attrition war with Iran, could prevent the economy from thriving in the long run.
Looking ahead, Ater sees the security situation, the Israeli-Palestinian conflict, and internal social divides as key long-term challenges for Israel's economy. Moreover, the ongoing judicial overhaul and its effect on democratic institutions must also be closely monitored.
Edited by: Uwe Hessler
Enrichment Data:The ongoing conflict in Israel during 2023-2024 has had several significant impacts on Israel's economy, unemployment rate, military spending, and high-tech sector:
Economy and Trade
- Israel's trade with China has experienced volatility amid the conflict and broader geopolitical tensions. Imports from China to Israel increased by about 20% in 2024 after a decline in previous years, while Israeli exports to China fell to their lowest level since 2014. This has resulted in a growing trade deficit with China, exceeding $10 billion for the first time. Despite this, Israel continues to rely heavily on the U.S. market for exports, with the share of exports to the U.S. growing from 24% in 2023 to 26% in 2024. The overall trade volume with the U.S. and the European Union remains higher than with China, reflecting a cautious balancing of trade policy amid the conflict and global trade wars.
- The broader Middle East instability related to the conflict risks triggering negative global economic impacts such as soaring oil prices and slower growth, which could indirectly affect Israel’s economy through inflation and trade pressures.
Military Spending
- Israel has significantly increased its military expenditure as a share of GDP due to the conflict. In 2023, military spending rose sharply to 5.3% of GDP, marking a substantial increase from 2022 levels. This trend has continued into 2024, reflecting heightened security needs during the war with Hamas and ongoing regional tensions.
Unemployment Rate
- Although not explicitly detailed in the search results, given the increased military spending coupled with the strain on the economy and trade disruptions, some economic sectors likely faced challenges. Historically, conflict periods can cause both disruptions and shifts in employment, with some defense-related sectors expanding due to military needs, while other sectors—particularly tourism and high-tech—may experience slowdowns.
High-Tech Sector
- The sector's resilience depends on Israel’s ability to maintain stable trade relations with the U.S. and Europe and to navigate the risks of the ongoing war. Increased security threats, trade disruptions, and economic uncertainty often lead to investment delays and operational challenges for the high-tech industry, which heavily relies on export markets and international partnerships.
In summary, the 2023-2024 conflict has driven up Israel's military spending substantially, strained its trade relationships especially with China, and created economic uncertainty that could impact unemployment and the high-tech sector. The balance between increased defense needs and maintaining economic and trade stability remains a critical challenge for Israel during this period.
- The ongoing conflict in Israel has not only resulted in destruction and heartbreak but also carried a heavy financial toll on the country's economy.
- The Israeli economy is struggling, with a labor shortage exacerbated by reservists being called up to fight, Palestinians losing work permits, and difficulties crossing borders.
- Increased military spending due to the conflict has pushed Israel to adopt new taxes, like raising the value-added tax and health tax, to alleviate some of the financial pressure.
- Despite some industries like high-tech, defense, and retail food remaining resilient, Israel's economy in 2024 has still been affected by the burden of increased military costs, stagnating high-tech employment, and uncertain future implications.
- The ongoing conflict and its resolution scenarios can have a significant impact on Israel's economy in both the short and long term, according to economist Itai Ater.
- The stability of Israel's economy is threatened by factors such as the Israeli-Palestinian conflict, internal social divides, ongoing judicial overhaul, and its effect on democratic institutions. Furthermore, the volatility in trade with China and broader Middle East instability pose risks to Israel's economic future.
