Israel’s post-war economic outlook: uncertainty eased, risks remain

ISRAEL - Report 14 Jul 2025 by Sani Ziv

The 12-day war between Israel and Iran ended with significant damage to Iran’s nuclear infrastructure and missile capabilities without escalating into a broader regional conflict. For Israel, the outcome represents a meaningful improvement in its geopolitical standing and a substantial reduction in long-term strategic risk. This shift has been clearly reflected in financial markets, with a sharp rally in equities, falling government bond yields, and a strengthening of the Israeli shekel.

Thanks to the swift end of the war, the economic impact on GDP appears relatively contained. The estimated output loss stands at approximately NIS 6 billion, primarily due to labor disruptions during the final two weeks of June. According to a flash survey conducted by Israel’s Central Bureau of Statistics, 35% of businesses reported a decline of over 50% from expected revenue for June, while 17% reported no impact at all. As a result, a temporary slowdown in Q2 2025 growth is expected; however, assuming the ceasefire holds, a solid rebound is anticipated in Q3. The updated full-year forecast projects GDP growth of at least 3%.

Our initial estimates put the total fiscal cost of the war between NIS 40-60 billion, assuming a prolonged and extensive conflict. In practice, however, the rapid conclusion of the military campaign against Iran significantly reduced the fiscal burden to approximately NIS 30 billion. A ceasefire agreement in Gaza would further reduce military expenditures there, which had previously been estimated at NIS 15-20 billion for a year. In parallel, tax revenues from January to May 2025 exceeded initial forecasts by approximately NIS 20 billion. As a result, the net impact on the fiscal deficit is expected to be limited, adding only about 0.5 percentage points of GDP. The full-year deficit is now projected at approximately 5.5% of GDP.

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