The state of the Israeli economy - opinion

There is a story about a group of ants that tried to describe an elephant upon whose body they lived. Since each ant observed a different, minute part of the elephant’s body, the image that emerged was not that of what an elephant looks like in reality.

These days, I have the same feeling when I try to describe and analyze the state of Israel’s economy, because what we see at any particular time depends on what we are looking at and the events of that moment.

Most economists these days express concerns about where the Israeli economy is heading. Many predict that future generations in Israel will have to pay for what is already measured as the longest, most expensive war in Israel’s history. No one can predict how much longer it will last, nor how exactly it will end.

Back to the current situation: The two diamonds in Israel’s economic crown are without doubt Israel’s hi-tech industry (especially those companies connected to cybersecurity) and its arms industries.

Much of the exports to Europe are related directly or indirectly to the war in Ukraine and the growing threat perceived from Russia. However, it is not clear how the figures for 2025 will be affected by developments in the war in Ukraine, or the European political and economic reaction to our war against Hamas – especially the humanitarian situation in the Gaza Strip.

Furthermore, while most of our arms purchases from the US are covered by American aid, it should be remembered that in 2024, Israel’s non-military trade deficit amounted to $31.60 billion. In addition, Israel purchased arms from countries other than the US – especially from Germany – which are not covered by American aid.

One major difficulty when evaluating Israel’s current economic situation is the total lack of concrete data about the government’s operational plans regarding the war in the Gaza Strip.

For example, we do not know what the prospects are for a temporary ceasefire, or total end of the fighting connected to a partial or total hostage deal. We do not know – especially not from Prime Minister Benjamin Netanyahu’s numerous and conflicting policy statements – whether we shall soon be involved in an intensive battle to conquer Gaza City, or whether a plan for the complete conquest of the Gaza Strip is still on.

Furthermore, we do not know for how long Israel will take upon itself the complete or partial cost of the humanitarian aid currently entering the Gaza Strip, or whether Israel will end up bearing the full burden of the Strip’s economy, or eventually also all its administration costs as well.

The confusion also stems from the economic evaluations of the Finance Ministry itself. In January 2025, the ministry predicted that the Israeli economy would grow in 2025 by 4.3%. In June the figure went down to 3.6% and in July to 3.1%.

Unless the war ends in the foreseeable future, this percentage is likely to rise again, as the recent NIS 30 billion rise in the defense budget suggests.

There are other questions looming over Israel’s economic future. It’s no secret that Smotrich is not an economist, and is quite ignorant of current economic theory and practice. Also, he has never concealed the fact that his religious beliefs and ideological agenda affect his economic decisions.

He has spoken of his belief in a biblical economy, which apparently maintains that if one follows God’s ways, God bestows abundance in return.

The problem is that since Smotrich became finance minister at the end of 2022, the highly professional team in the Finance Ministry has dwindled, and few appropriate professional appointments have been made.

The current government has turned appointing “acting position” holders, rather than permanent ones, into a regular practice, to get around blatant problems of their unsuitability.

Another problem concerns Israel’s credit rating, which has usually been very high. But since the war broke out, it has been reduced twice by the central international credit rating agencies because of various controversial economic moves connected to the war.

Added to this are the moves by various European states to reduce their financial investments in Israel. For example, Norway’s sovereign wealth fund, the world’s largest of its kind, has recently removed 23 Israeli companies with connections to the West Bank and Gaza from its portfolio. This was designed to punish Israel for alleged breaches of international law in the Gaza Strip. Whether this phenomenon will spread or be reversed, should Israel change some of its policies, is yet to be seen.

Also troubling is the collapse of numerous small Israeli businesses due to their owners’ prolonged periods of mandatory military reserve duty. We do not have figures about the extent of this phenomenon, but it does exist and is certainly socially significant.

Since, at its base, the Israeli economy is sturdy, we shall most likely manage to survive all of these difficulties. Nevertheless, the problems cannot, and should not be belittled or ignored.