Israel Says Economy Lost Over $57 Billion During Two Years of War in Gaza

Israel lost 8.6% of annual GDP — 177 billion shekels ($57 billion) — over the two years through 2025, the Bank of Israel says, attributing the loss mainly to the 2023–2024 war with Hamas in Gaza and operations in Lebanon. The large output shortfall signals weaker growth and heightened fiscal strain, increasing risk-off sentiment for Israeli assets and raising potential pressure on sovereign financing and regional investment flows.

Analysis

The macro shock creates a two-track dynamic: near-term hit to demand-sensitive sectors (tourism, retail, construction activity) and a multi-year reallocation toward defense, reconstruction and higher sovereign risk premia. Expect fiscal deficits and higher borrowing costs to crowd out private capex for 12–36 months unless external financing or targeted guarantees materialize; that creates a durable headwind for domestically exposed cyclicals while boosting suppliers of materials and defense systems. Currency and banking channels are key transmission mechanisms — a weaker shekel raises imported-input inflation and erodes real wages, compressing consumer discretionary margins within quarters, while stress on mortgage books and corporate loans will surface unevenly across regional lenders into the next rating review cycle. Finally, reconstruction spending and rearmament amplify demand for certain supply chains (semiconductor/avionics components, specialty chemicals, construction materials) but those pockets are capacity-constrained and will likely see price/warranty disputes, delivery delays and margin volatility over 6–24 months.

Key Decisions for Investors

• Long ESLT (Elbit Systems) 12–24 month horizon: tactical overweight to capture rearmament backlog plus export opportunities. Position size 3–5% net long; target +25% total return, stop -25% if order cancellations or offsetting export controls tighten.
• Paired trade – long ICL (Israel Chemicals) vs short EIS (iShares MSCI Israel ETF) for 9–18 months: captures reconstruction/materials upside while hedging sovereign/consumption risk. Use 1.5:1 notional tilt toward ICL; expect asymmetric payoff if reconstruction accelerates (2:1 upside/downside), cut if sovereign spreads tighten >150bps.
• Directional hedge: buy 9–12 month EIS puts (or put spread) to protect Israel-country equity exposure through next sovereign-rating and budget cycles. Cost should be sized as insurance (~1–2% portfolio cost) to cap tail losses from sovereign shock widening.
• Tactical risk-off: increase cash/short-duration IG sovereigns for 3–6 months and add selective long USD vs ILS exposure (or UUP ETF as proxy) to insulate purchasing power; target duration reduction of 0.5–1.0 years and currency hedge size 25–50% of Israel-exposed equity beta.