In conventional paradigms, war typically connotes economic recession, capital flight, and financial market volatility, particularly when the conflict erupts on domestic soil or within neighboring states. Following the war in Ukraine, Russia's growth decelerated to 1% in 2025 and turned negative again in early 2026. Meanwhile, under the dual pressures of prolonged sanctions and conflict, Iran's monetary system pushed toward collapse, with its national currency experiencing an extreme single-day depreciation of 96.8%. In stark contrast, Israel’s performance stands out as an anomaly. Despite more than three years of high-intensity conflict, direct involvement in military operations against Iran, and the compounding effect of sharply rising oil prices, its economy and financial markets have not only avoided systemic instability but also maintained relatively high growth and capital attraction. The Bank of Israel projects economic growth of 3.8% for 2026, which, though downgraded from the pre-conflict forecast of 5.2%, remains significantly higher than the 2.3% of the United States and the 1.3% of the European Union. The International Monetary Fund estimates its growth will reach at least 3.5%, with the potential to rise to 4.4% in 2027. Concurrently, the New Shekel has appreciated by 6.75% over the past two months, culminating in a cumulative appreciation of 18.61% over the year. This series of data demonstrates that the operational logic of the Israeli economy has clearly diverged from the usual framework of "war equals recession", reflecting not merely simple short-term resilience, but an economic operational model characterized by deeper structural attributes.

The first reason concerns the structural decoupling of risk and growth. From a macroeconomic perspective, Israel is exhibiting a rare economic state. While risk levels escalate, growth projections have not experienced a corresponding decline. On the contrary, it even strengthened across certain indicators. Typically, war suppresses economic growth through fiscal deterioration, capital flight, and inflationary shocks. However, Israel's performance across these areas shows no signs of spiraling out of control.

Data indicate that while Israel’s fiscal position and debt are under pressure, they remain within a manageable range. The International Monetary Fund (IMF) projects that Israel's public debt-to-GDP ratio for 2026 will be approximately 69.8% to 70.5%, significantly below the Group of Seven (G7) average of 123.7%. After peaking at 6.8% of GDP in 2024, the fiscal deficit receded to 4.7% in 2025, with a target range of approximately 3.9% to 5.3% for 2026. Even with military expenditures having spiked to roughly 8% of GDP and remaining around 6% in 2026, the fiscal architecture still retains a degree of resilience. Such a fiscal state, while being pressured, is not out of control, and this provides the necessary baseline for maintaining market confidence.

Furthermore, Israel's inflationary and monetary environment has remained stable, preventing the macroeconomic imbalances typically induced by war. In 2026, Israeli inflation is projected to be around 2.2% to 2.3%, with the actual operational range fluctuating roughly between 1.8% and 2.6%, sitting comfortably within its policy target of 2% to 3%. In contrast, during the same period, CPI in both the United States and the United Kingdom hovered around 3.3%, with both economies facing more pronounced imported inflationary pressures driven by rising energy prices. Interest rates have been sustained at approximately 4%, providing monetary policy with continued room for adjustment. This implies that, against the backdrop of energy shocks, Israel has averted the onset of typical war-driven inflation.

Moreover, Israel's labor and growth fundamentals have remained tight yet stable. In early 2026, the unemployment rate stood at approximately 2.7% to 3.2%, below the U.S. rate of 4.3% and the Eurozone rate of 6.2%. Although the war has triggered reserve mobilization and reduced foreign labor, delivering a shock to sectors such as construction, the overall job market has maintained a tight equilibrium, thereby supporting consumption and the tax base.

Even more critical is the structure of the external accounts and capital flows. Israel maintains a current account surplus of approximately 3.2% of GDP and continues to attract net capital inflows. This implies that it is not a vulnerable economy reliant on external financing to sustain operations, but rather possesses the capacity to continuously export technology and services globally. Under this structural framework, even as risk premiums rise, capital has not staged a systemic retreat but instead continued to flow in.

These factors collectively constitute a structural decoupling phenomenon defined by "rising risk without a corresponding decline in growth". The emergence of this phenomenon indicates that the core drivers of the Israeli economy do not depend entirely on traditional macroeconomic conditions but stem more from the internal stability of its structural framework and the persistence of external demand.

The second reason is that war actually functions as a structural filtering and reinforcement mechanism. At a deeper level, the war has not simply weakened the Israeli economy. Rather, it has to some extent served as a mechanism for structural filtering and reinforcement. This process is not a short-term stimulus, but a transformation of the internal architecture of economic operations achieved through the reallocation of resources and the repricing of risk.

Indeed, the war has reinforced Israel's positioning within the global security and technological ecosystems. The high-tech sector has long served as the core of its economy. According to data from the Israel Innovation Authority and relevant industry sources, high-tech accounts for approximately 20% of Israel's GDP, roughly 15% of total employment, and contributes over half of its exports, making it one of the country's most critical growth engines. With the eruption of the conflict, demand in fields such as cybersecurity and defense technology has risen significantly, further underscoring the global competitiveness of this sector. In 2025, two historic transactions, those of Google's acquisition of Wiz for USD 32 billion and Palo Alto Networks' acquisition of CyberArk for USD 25 billion, totaled USD 55 billion, equivalent to approximately 10% of Israel's GDP. A capital inflow of this magnitude is extraordinary even on a global scale.

The war has also driven a concentration of investment structures toward strategic sectors. In 2025, Israeli high-tech financing reached approximately USD 15.6 billion, while the total volume of mergers and acquisitions hit a record high of USD 74.3 billion. This indicates that capital did not evade risk due to the conflict, but rather converged on areas of greater certainty following a re-evaluation. Concurrently, natural gas development and defense exports have also emerged as vital pillars of growth, skewing the economic structure further toward high-value-added and security-related industries.

As things stand, the conflict has altered investor expectations through the logic of a "security premium". On a global level, it pushes up oil prices and inflation, dealing a negative blow to most economies. However, for Israel, the sustained operations against Hamas, Hezbollah, and Iran are interpreted by certain market segments as a necessary process to improve the long-term security environment. This expectation causes the war to be viewed by some capital as an "advance release of long-term risk", thereby generating a market feedback loop that runs counter to conventional wartime dynamics.

Moreover, demographic factors have also played an amplifying role in this process. Over the past two decades, Israel's population has grown at an average annual rate of nearly 2%, which is exceptionally high among advanced economies, paired with a relatively young overall age structure. This characteristic not only sustains the labor supply but also enhances the economy's capacity to recover from shocks. Consequently, from a structural perspective, the war has not simply degraded the economy; instead, through resource reallocation, capital repricing, and industrial concentration, it has driven the evolution of the Israeli economy toward higher value-added one and a stronger reliance on external demand.

Third, Israel adopts a non-traditional war economy model driven by tech-capital. The deeper reason the Israeli economy has been able to sustain growth amidst conflict lies in the fact that its operational model no longer mirrors that of a traditional industrial economy; instead, it exhibits an "unconventional; war economy model" driven primarily by technology and capital.

The core of this model lies in the fact that growth does not depend on large-scale domestic manufacturing or energy consumption, but rather on high-tech exports and global capital allocation. In 2025, the recovery of the Israeli economy was primarily driven by a rebound in investment and exports. Within this framework, fixed asset investment grew by approximately 7.1%, and exports expanded by about 5.9%; moving into the fourth quarter, exports experienced a further pronounced rebound, with year-on-year growth temporarily reaching around 33%. This structure implies that even if domestic consumption and certain sectors suffer disruptions, overall growth can still be sustained through external demand and capital inflows.

Simultaneously, financial markets play a pivotal role within this model. The high integration of Israel's capital markets with international tech-capital ensures that asset pricing depends more heavily on global technological cycles than on the localized security environment. Although credit ratings carry a negative outlook, they remain firmly within the A-grade category, reflecting an escalation in risk that has nevertheless failed to trigger systemic sell-offs. Instead, this risk coexists with rising growth expectations. This dual ascent of both risk and growth represents a structural phenomenon rarely observed in traditional economies.

In addition, this model has strong external embeddedness. Israel does not operate in isolation. In fact, it is deeply integrated into the U.S. and global technology ecosystem. Technology, capital, and markets form a closed-loop system that enables it to maintain external connectivity even amid conflict. This structure means that even as geopolitical risks rise, its economy can still draw support from global networks.

It is worth noting that this model is not without costs. War has led to labor mobilization, weak consumer demand, and damage to the tourism industry, while long-term fiscal pressures are also accumulating. That being said, at the current stage, these negative factors have not yet been sufficient to offset the growth momentum driven by technology and capital.

All in all, Israel's ability to sustain economic and financial market prosperity amidst the shocks of war and rising oil prices is not an isolated phenomenon, but rather the cumulative result of multiple intersecting structural factors. On one hand, its low leverage, stable inflation, and robust capacity to attract external financing provide the macroeconomic architecture with a foundational buffer against external shocks. On the other hand, the deep integration of its high-tech sector with global capital divorces its growth logic from traditional energy and production constraints. Most importantly, under specific conditions, the war has instead acted as a catalyst for structural adjustment and the repricing of risk.

This situation does not imply that war itself possesses positive economic value, but rather demonstrates that under a specific economic structure, the impacts of conflict can be re-absorbed and transformed. For most countries, lacking a similar industrial composition, capital framework, and degree of external embeddedness makes this model exceedingly difficult to replicate. Therefore, rather than simply interpreting this as "wartime prosperity", it is more accurate to view it as a structural outcome dependent on highly specific conditions. When the core drivers of economic growth shift away from traditional factors and toward technology and capital, the transmission channels through which war impacts the economy will fundamentally alter accordingly.

Final analysis conclusion:

Taken together, Israel's performance is not a case of "exceptional wartime prosperity," but rather reveals a highly unique economic operating logic. When a country's core growth drivers shift toward high-tech exports and global capital allocation, its sensitivity to energy shocks and geopolitical risks decreases significantly, potentially giving rise to structural characteristics in which risk and growth coexist. Although the viability of this model relies on profound industrial capabilities, capital mechanism, and deep external embeddedness, rendering it not necessarily universally replicable, its ability to decouple from traditional wartime risks nonetheless offers valuable insights.

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Zhou Chao is a Research Fellow for Geopolitical Strategy programme at ANBOUND, an independent think tank.