David SchutzThe Israeli economy teetered on the edge of collapse this week, as a late-night US-brokered ceasefire with Iran halted a spiralling conflict just before it could have bled the country dry.
On Tuesday, both Iran and Israel signalled a pause in hostilities, bringing a tentative close to 12 days of aerial combat that had drawn in the United States.
The conflict, which saw American airstrikes on Iranian uranium-enrichment facilities, came to an abrupt halt after US President Donald Trump issued a public reprimand for what he called violations of the ceasefire he declared late on Monday night.
With civilian restrictions easing on both sides, leaders in Tehran and Tel Aviv quickly sought to cast themselves as the victor.
But for Israel, analysts argue that the ceasefire arrived just in time to prevent a spiralling economic collapse, as war-related debt, disrupted supply chains, and mass consumer retrenchment put Israel in danger of a financial crisis.
“If the war had continued, Israel would have lost in two months the same amount it lost in Gaza in two years,” says Nasser Abdel Karim, an economics professor at American University in Palestine.
“Israel would not have been able to bear a protracted war,” he tells TRT World.
The war’s economic effects, long viewed by Prime Minister Benjamin Netanyahu’s government as manageable, began cascading into the everyday life of Israelis last week. With Iranian missiles hitting major cities, key sectors shut down operations.
Last Friday, Israel’s oldest hospitality chain, Dan Hotels, abruptly announced to the Israel Securities Authority it was closing half its branches and sending most staff on leave, citing “material negative impact” caused by the war in Iran.
The company said it “expected this to continue throughout this war and beyond”, mainly due to the collapse of tourism under the government’s closed-skies policy.
The same day, shipping giant Maersk said on its website it had halted operations at the Haifa port after a missile strike hit a nearby factory. Hopes that freight could be rerouted to Ashdod faded as Israel’s Chamber of Shipping confirmed no such shift materialised.
In the occupied West Bank, supply chain breakdowns led to fuel and refrigerated goods shortages, leaving agricultural produce rotting.
Civilians feel economic shockwave
Families began cancelling vacations, delaying major purchases, and switching to cheaper essentials.
“We were supposed to take the kids to Eilat this summer, but my (army reservist) husband spent many days in Gaza. Between that and supermarket prices, we decided to cancel. Even little things, we’re buying store-brand diapers now,” 39-year-old Dana Miller, a mother of two from Tel Aviv, tells TRT World. Eilat is a popular Red Sea resort town on the Aqaba Bay.
Five days into the war, major mall chains announced partial reopenings under new guidelines to try to salvage the retail sector.
But with missile attacks that killed at least 23 people, wounded hundreds, displaced thousands, and destroyed or damaged buildings, many malls remained mostly shuttered, despite being cleared to open if they had shelter capacity. Small businesses faced higher costs and were forced to rethink their models.
“The whole mall is empty… cafés, restaurants, everything is closed. Only essential places like supermarkets and bakeries are open,” Lorean Asadi, a bakery worker at Herzliya’s Arena Mall, tells TRT World.
“Our bakery had a few seats outside, but the police came quickly and said they’d shut us down if we didn’t remove them.”
What made this moment especially unsettling was that, unlike in recent conflicts, Israel no longer controlled the scale of escalation.
“Sometimes I don’t know how we’ll survive,” says Miller. Her sister urged her to leave, but she decided to stay because “this is our home”.
“I just don’t know how much longer we can live like this… between the sirens, the shelter runs, and the prices going up every week,” she says.
Strategic miscalculations
Prior to Israel’s “pre-emptive” strike on Iran, and despite heavy military spending over the past 18 months to fund operations in Gaza, Lebanon, Syria, and Yemen, the economy had remained largely functional.
Buoyed by a resilient tech sector that contributes roughly 20 percent of GDP and accounts for more than half of the country’s exports, the burden of mobilising nearly 300,000 reservists had been partly absorbed.
But as the conflict escalated directly with Iran, even an economy long shielded from the worst effects of war began to buckle.
In response to Israel’s attack on Iran, which began on June 13, with a large-scale air and drone assault known as “Operation Rising Lion”, Iran launched a massive retaliatory attack.
The conflict quickly escalated into a 12-day exchange of missiles and air strikes, with both nations suffering significant losses and widespread destruction.
Throughout the war, Iran responded with more than 590 ballistic missiles and over 1,000 drones, many of which were intercepted by Israeli defences. However, dozens struck their targets, inflicting civilian casualties and damaging critical infrastructure.
Israel reported dozens dead and more than 590 wounded, including several serious injuries. Damage to cities, closed airspace, and disrupted supply chains quickly reshaped consumer behaviour.
Household budgets tightened, businesses retrenched, and discretionary spending evaporated.
Economic analysts estimate that Israel spent approximately $1.45 billion in just the first two days of strikes, with direct military operations costing about $725 million per day thereafter.
This came on top of a sharply increased defence budget in 2024, which rose to 168.5 billion shekels (about $49.4 billion), a 65 percent jump from the previous year and equivalent to 8.4 percent of GDP, the second-highest in the world after Ukraine.
According to Karim of American University, “The war was being fought at a pace [Israeli Prime Minister] Netanyahu simply couldn't survive. Eventually, protests would’ve erupted, since Israelis are used to a certain quality of life, and even US backing couldn’t spare Israel from needing to stop spending that much.”
To finance its wars, Israel’s government has borrowed heavily, driving national debt sharply higher.
In 2024, the debt rose to approximately 1.33 trillion shekels (about $370 billion), fueled largely by wartime expenditures. The debt-to-GDP ratio climbed from 61.3 percent in 2023 to nearly 69 percent by the end of 2024, just one percentage point below the peak during the COVID-19 pandemic.
To cover mounting costs, the government has issued record levels of debt, including $5 billion raised through its US-based bond broker, Israel Bonds, since the war with Hamas began in October 2023, more than double the amount raised during similar periods in the past.
In March, the government enacted the largest budget in its history, allocating 131.2 billion shekels (about $38.6 billion) for defence, a 21 percent increase over the previous year.
Israeli markets bet on America
On March 26, 2025, during a short-lived ceasefire in Gaza, Israel’s chief banker Amir Yaron criticised Israel’s recently approved national budget, saying its bigger-than-ever military allocation would offset recovery from the war.
When Israel launched its strike on Iran, eight weeks after Yaron’s address, the new war added additional pressure, according to Brigadier General Reem Aminach, as reported by Ynet. These expenses, largely unbudgeted, were covered through additional debt.
Strategically, Israel’s leadership appeared to be wagering that deeper US involvement would become inevitable if it committed to a conflict it couldn’t win outright or sustain alone. The expectation was that Washington would step in.
But as the days passed without American backing, each additional strike on Iran added to a war effort that was quickly becoming an untenable sunk cost, one Israel could neither carry indefinitely nor abandon without consequence.
“The ceasefire arrived at the right moment,” Yaron Gilmelfarb, an analyst at a Tel Aviv investment house, tells TRT World.
Without it, Gilmelfarb says, “we were looking… at prolonged shutting down of the economy, deeper debt traps, and the very real risk of capital flight and mass unemployment. The economy could not have sustained another week at that pace.”
On the Israeli stock market — where price action often follows different rules than the broader economy, particularly given the prominence of military-adjacent firms – the TA-125 Index surged for six consecutive days following Israel’s strike on Iran.
Investors poured money into companies whose workforces were still sheltering, with no return to normal operations in sight. The index saw its only daily decline of the 12-day war on Monday, not in response to the ceasefire, but as it became evident the US had no immediate plans to escalate the conflict.
This article is published in collaboration with Egab.
