Israel's economy beat three years of war, but the defense bill is growing

what happened

According to WSJ, Israel's economy is gaining momentum despite more than three years of conflict, with inflation cooling and the technology sector thriving. The IMF expects growth of 4.5% this year, up from its July forecast of 3.5%, the fastest projected rate among OECD members.

But war costs are weighing on the budget. The Bank of Israel estimates conflict-related fiscal costs for 2023 through 2026 at 405 billion shekels. Public debt is forecast to reach 68% of GDP this year, and the deficit 4.4%. President Trump said US military aid to Israel would be cut off by the end of the year.

why it matters

For markets, the key question is how Israel balances defense spending, debt and investment in growth. If military costs stay high, the government may have to raise taxes, cut civilian services or borrow more, which matters for the shekel and Israeli bonds.

market impact

Shekel and Israeli bonds: a wider deficit and rising debt add pressure on public finances

• ↔Israeli government bonds mixed — rising debt and deficit weigh, while low borrowing costs and domestic investors support demand
• ↔Israel shekel mixed — strong growth and central bank reserves support it, while defense spending and deficits weigh

tags

instruments