politics

Israelis Anticipate Possible Economic ‘Peace Dividend’ Following Conflict with Iran

NewsBlog

4 Jul 2025 - 20:33 WIB

Following a 12-day conflict with Iran, Israel is grappling with the economic consequences of war, yet many in the country remain optimistic. A U.S.-mediated pause in hostilities has raised hopes for a broader regional peace and economic revival. While the war inflicted economic damage, some experts suggest it also laid the groundwork for new alliances and long-term stability in the Middle East. Investors, analysts, and everyday Israelis are now looking toward a potential “peace dividend” that could transform the economic landscape.

I. Economic Shifts Following Conflict

1. Signs of Financial Optimism

Despite the war’s intensity, Israel’s financial markets have shown surprising strength. Stock indexes in Tel Aviv soared to record highs just two days into the conflict, and the shekel has appreciated by 8% since June 13, reaching levels not seen in over two years. Investor confidence appears buoyed by expectations that recent military gains could result in a shift in regional dynamics, opening new avenues for cooperation with neighboring states.

2. A Boost From Potential Ceasefire

Investor sentiment was further lifted when U.S. President Donald Trump announced that Israel had accepted the terms of a 60-day ceasefire in Gaza. Though neither Hamas nor the Israeli government has officially responded, the possibility of a truce has led to a sharp drop in Israel’s risk premium. With credit default swaps trending downward, some analysts now foresee interest rate reductions as early as August.

II. Reimagining Regional Alliances

1. Strategic Shifts in the Middle East

Underlying this optimism is the belief that the geopolitical landscape in the region is undergoing a transformation. Setbacks to Iran’s nuclear ambitions and the weakening of its allies in Lebanon, Syria, and Gaza are viewed as strategic victories for Israel. These developments may encourage peace efforts with long-time adversaries and renew diplomatic engagement, echoing the spirit of the Abraham Accords signed in 2020 with the UAE, Bahrain, and Morocco.

2. A Vision of Economic Integration

According to Gil Dotan of IBI Investment House, investors anticipate new business opportunities stemming from improved ties with regional neighbors. Finance Ministry chief economist Shmuel Abramzon echoed this view, stating that the region is currently experiencing a “de-risking” process, which could minimize geopolitical threats and stabilize economic conditions.

III. War’s Immediate Economic Toll

1. Economic Growth Forecasts Revisited

While long-term prospects appear promising, the short-term economic impact of the war is significant. Israel’s Finance Ministry is revising its 2025 growth projection of 3.6%, citing approximately 8 billion shekels (around $2.37 billion) in war-related damages. J.P. Morgan has already lowered its outlook for Israel’s growth to 2% from 3.2%.

2. Disruptions to Key Industries

Iranian missile strikes led to the deaths of 28 individuals in Israel and extensive infrastructure damage. Iran, in turn, reported over 600 fatalities from Israeli attacks on its nuclear and security sites. The conflict disrupted several vital sectors. For example, the Leviathan offshore gas field had to suspend operations, resulting in a $12 million loss in export revenue to Egypt and Jordan. Similarly, Israel’s largest oil refinery was temporarily shut down after a missile strike.

3. Business Closures and Labor Shortages

Though 95% of Israeli factories managed to stay operational during the war, about 35% of businesses forecasted revenue losses of over 50% for June. Many employees were called into military reserve duty, straining the labor force. Small business owners like Jerusalem restaurant operator Tzvi Maller likened the economic atmosphere to that of the COVID-19 lockdowns, citing a lack of tourism and reduced foot traffic. He has remained afloat thanks to local customers and personal investment.

IV. Resilience and Recovery

1. Signs of a Return to Normalcy

Even businesses forced to close during the conflict, such as Holmes Place’s 74 fitness centers, witnessed a rebound. CEO Keren Shtevy noted a significant rise in attendance and new memberships post-conflict, indicating a public yearning for normalcy and routine. This resurgence reflects the broader resilience of the Israeli economy, even under prolonged stress.

2. Defense Budget Projections

Bank of Israel research head Adi Brender suggested that military spending may ease in the near future. He argued that recent gains against Iran could reduce the need for sustained high levels of defense expenditure. This shift could free up resources for other sectors and ease the national debt burden that has surged since the Gaza conflict reignited in 2023.

V. Structural Economic Challenges

1. Long-Standing Issues Persist

Despite the recent economic bounce-back, former Bank of Israel Governor Karnit Flug warned that fundamental challenges remain. Issues such as elevated living costs and low labor force participation among ultra-Orthodox Jewish men continue to weigh on economic potential. Flug emphasized that while Israel’s economy has shown remarkable resilience, these long-term obstacles require strategic policy solutions.

2. The Cost of Prolonged Conflict

Nearly two years of warfare in Gaza have significantly strained Israel’s fiscal health. Increased defense spending and emergency response efforts have added to the national debt and driven up inflation. Nevertheless, the high-tech sector—Israel’s economic crown jewel—continues to thrive, offering a much-needed engine for growth.

VI. The High-Tech Boom

1. Record-Breaking Investments in Tech

Israel’s tech sector, accounting for 20% of national GDP, is experiencing unprecedented growth. According to Startup Nation Central, tech startups attracted over $9 billion in the first half of 2025—marking the best half-year period since 2021 and a 54% increase compared to the last six months of 2024. For all of 2024, tech firms raised $12 billion in funding.

2. Global Investor Confidence

Jon Medved, CEO of the investment platform OurCrowd, said international investors remain deeply committed to Israeli tech, especially in fields such as artificial intelligence and cybersecurity. He added that the dismantling of Iran’s nuclear program could accelerate foreign interest in Israeli innovation, opening the door to new partnerships and growth avenues.

Conclusion
Israel’s short but intense war with Iran has left both visible scars and unexpected opportunities. While the economy absorbed immediate shocks—particularly in energy and small business sectors—the nation has demonstrated resilience and adaptability. Positive developments in financial markets, a robust tech sector, and potential peace dividends from regional shifts all point to a cautiously optimistic future. However, enduring structural challenges and geopolitical uncertainties remain. Whether Israel can turn wartime disruption into lasting prosperity will depend on its ability to maintain peace, implement economic reforms, and expand diplomatic outreach.

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