Having long sold itself as the ‘start-up nation’, Israel is now in economic turmoil, with the war it is waging in Gaza resulting in the withdrawal of long-standing partners. Declining growth, a brain drain and diplomatic isolation are diminishing a model that was considered exemplary.
Israel has established itself one recent years as a major player in technological innovation. The country is home to large companies in the sector and is a major exporter of software, medical devices and cybersecurity technology.
But since the start of the war in Gaza and amid rising tensions with Iran, the country has entered a new economic era – and the figures speak for themselves.
In the last quarter, Israel's GDP contracted sharply. Household consumption is falling, private investment is slumping and production is slowing down.
The outlook is not encouraging. Growth is forecast to be no more than 1 percent in 2025, and was just 0.9 percent last year. This is in stark contrast to 2022, when the Israeli economy grew by 6.5 percent.
Inflation is around 3 percent and the budget deficit is skyrocketing. To support the Israeli currency, the shekel, the Central Bank has had to inject more than $30 billion into foreign exchange markets.
On a human level, nearly 170,000 people have left the country since 2023 – many of them young graduates representing a highly skilled workforce. This brain drain is exacerbating the sense of economic and financial instability.
Investor flight and diplomatic isolation
There has also been a notable loss of confidence among foreign partners. Foreign direct investment is falling, international financing is freezing up and several major contracts are being called into question.
The European Union, Israel's largest trading partner, is considering reducing certain collaborations – a worrying sign for an economy that depends heavily on trade with the 27 member states.
NGOs call on EU to stop doing business with Israel's 'illegal' settlements
The Norwegian sovereign wealth fund withdrew from several Israeli defence companies this summer.
In the United States, some tech giants such as Microsoft are reviewing their commitments in Israel under pressure from public opinion.
Even long-standing allies such as Colombia are seeking to do without Israeli equipment. Bogotá has just unveiled its first locally produced assault rifle, having put an end to its orders from Israel.
These withdrawals are creating a domino effect, with the loss of this support and capital weakening Israeli growth and threatening its position on the international stage.
France pays tribute to victims of Hamas attack, two years on
Beyond the figures, the effects are being felt in everyday life. The cost of living remains high, and taxation is likely to increase to finance military spending and fill the budget deficit.
In the medium and long term, the loss of attractiveness and talent could lead to business closures and rising unemployment.
For Israel, the challenge is now clear: to regain the trust of its partners and halt this spiral of isolation before it permanently undermines its economic model.
Israel still has undeniable assets – recognised technological expertise and a diversified economy – but its future depends more than ever on the political and diplomatic choices of its leaders.
This article has been adapted from the original version in French by Stéphane Geneste.
