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The Israeli economy has long been an outlier among the advanced nations, and now that hostilities have ceased in Gaza, the country’s growth prospects are very strong for 2026. Defying normative economics, the two years of war on multiple fronts, Israelis did not have to choose between ‘guns or butter’ (so familiar in economics 101 classes) in the sense that it was able to conduct military operations without undue harm to the domestic economy. Since the Oct 7, 2023 attack, the Shekel remained very stable, the high-tech sector continued to attract considerable foreign investment, inflation was running at just around 3%, and the overall trade balances remain positive. Put differently, Israel was a net exporter of capital during a time of war, unprecedented. A remarkable show of resilience, all the while there was a large call up of reserves to support the standing army and, yet, most economic activities remained operating. 

At the macro level, the OECD projects that the Israeli economy will expand by 3.4% in 2025 and 5.5% in 2026, outperforming all other advanced economies. By comparison, U.S. is forecasted to grow by 1.5%, Canada by 1.2%, the EU by 1%, and China by 4.4%. 

There are several factors underlying this strong macro picture.

Reduction in defense expenditures. The conduct of the war did put considerable stress on the country’s fiscal positions in 2024. The budget deficit as a percentage of GDP in 2024 reached 6.9%, compared to 5.1% in 2023. Defense expenditures reached 8.8% of Israel’s GDP, the second highest in the world in 2024 (only exceeded by Ukraine).However, the 2025 budget the defense budget is nearly 20% smaller than in the previous year. At the height of the conflicts in 2023/24, some 300,000 reservists were called up. Indications now are for a return to more normal active service levels estimated at 100,000 (those in mandatory conscription). As reservists return to their pre-war existence, the economy will expand rapidly. 

Strong External Trade Relations. The real strength of the Israeli economy lies in its external relationship with its trading partners and especially foreign investors. Israel is projected to continue to run current account surpluses in 2025 of 2.8% of GDP, similar to that experienced in 2023 and 2024. The IMF expects the surplus on current account to reach $17 billion this year, up from $15 billion last year. In layman terms, the country earns more from its exports of goods and services, including its net income from investments held abroad than it spends on imports and outbound payments. As a result, its foreign exchange reserves grew by more than 10% since October, 2023.

• The High-Tech Sector Continues to Attract Capital. Foreign Direct Investment (FDI) in 2024 is estimated to be $17 billion, slightly above that of 2023. Overall, net investments by non-residents surged in 2024 to $27 billion, compared to just $ 8 billion in 2023.Overwhelmingly, investment in high-tech companies dominated this influx of capital, some estimates suggest that 75% of FDI is directly related to high-tech investments. The technological advances the Israeli military revealed during the course of its conflicts with Hizballah and Iran has aroused tremendous interest from European governments seeking to upgrade their military as part of the overall commitment to NATO.
• Reduction in Government Deficits. In 2023 the national budget deficit was running at 4.5% of GDP, only to increase dramatically to 7% in 2024. Similarly, the government debt as a percentage of GDP rose from 61% in 2023 to 69% in 2024. On a cumulative basis, the fiscal deficit up to September 2025 was 4.7%, in line with the deficit pre-war. 
• Exceptional Population Growth. Israel is clearly an outlier with respect the demographic trends in advanced nations. Its Total Fertility Rate (average number of children a woman is expected to have in her lifetime) is the highest in the OECD nations at 3.1.While ultra-Orthodox (Haredi) women record 6.5 children per women, Jewish Women and Muslim women record birth rates of 2.5 and 2.75, respectively. Israel is the only country in the OECD where the population is fertility rates are trending higher, and clearly beyond replacement rates.

Should that the Abraham Accordsbe expanded to include Saudi Arabia and other states in the region, provides additional optimism.

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