OMM Newsroom
Israeli voters went to the polls on October 27 in the first parliamentary election since the Hamas-led attacks in October 2023 and the regional conflicts that followed. The vote will determine the composition of the new parliament. Prime Minister Benjamin Netanyahu’s Likud party is competing against opposition forces, including Yashar, led by former military chief of staff Gadi Eisenkot.
Alongside the election, attention is focused on how Israel’s economy has performed during three years of conflict and the financial challenges the next government will face, AnewZ reports. The figures point to a sharp contrast between financial market performance and the state of public finances.
Markets rise as government spending grows
Israeli stocks have gained about 130% since October 2023, compared with an 80% rise on Wall Street, according to Reuters. The shekel has also strengthened by about 25%, making it one of the world’s best-performing currencies.
Israeli government bonds have returned about 30% over the past two years, more than twice the performance of major emerging-market bond indexes. These figures have been supported by demand for technology, defense exports and artificial intelligence-related products.
Lior Yochpaz, chief investment officer at Israeli insurance company Menora Mivtachim, told Reuters that businesses had continued to perform successfully despite political turmoil, disputes over judicial reforms and regional conflicts. However, strong corporate performance reflects only part of the economic picture.
Reuters estimates that the ongoing war has cost Israel more than $55 billion. Public debt has approached 70% of gross domestic product (GDP), about 10 percentage points higher than in 2022. Defense spending has nearly doubled to 8% of GDP, while the budget deficit has widened significantly.
Because public debt is ultimately serviced through public revenues, higher military spending competes with funding for other areas. According to the latest forecast published by the Bank of Israel on October 21, the budget deficit will reach 4.4% of GDP in 2026 and 4.6% in 2027. The bank also expects public debt to reach about 68% of GDP by the end of the year.
The central bank has warned of uncertainty over defense spending, government revenues and future budget decisions.
Growth forecast and election impact on markets
The Bank of Israel forecasts that the economy will grow by 5.6% in 2026 and 7.5% in 2027. However, the figures include production abroad, which makes a significant contribution to the forecast. Excluding that activity, growth is expected to reach 3.4% this year and 5.1% next year. Therefore, high overall growth does not mean domestic economic activity is expanding at the same pace.
According to a financial analysis by Reuters Breakingviews, the technology sector accounted for 18% of GDP in 2025 and generated about half of economic growth. The sector’s large share of the economy raises long-term questions about the breadth of the tax base and how rising defense spending will be financed.
Research by the Tel Aviv Stock Exchange covering the previous 10 elections found that volatility in major stock indexes rose by as much as 45% in the weeks after voting, compared with an average week. Initial losses generally recovered within a month, and indexes gained about 1.7% on average. In the year after elections, the TA-125 index returned an average of 16.4%, compared with a long-term annual average of 11.5%. These are historical averages, not forecasts for the outcome of the October 27 election.
In an assessment issued in August, JPMorgan said the election could move the shekel by up to 3% in either direction, depending on how political developments unfold. The bank’s scenarios reflect how investors might assess possible changes, not certainty about the election outcome.
Regional markets are also watching the election for its potential impact on diplomatic relations and security. Jean-Charles Sambor of investment firm TT International told Reuters that a change in Israel’s political leadership could reshape investors’ views of regional risk. He said Lebanese government bonds could present a potential investment opportunity if the regional situation improves. However, the prospect of greater regional stability remains uncertain.
The immediate question is which force can form a government in a fragmented parliament. The broader economic test will be how defense spending, borrowing and investment are managed while regional uncertainty persists. The election result is only the beginning of that assessment for voters, businesses and the economies of neighboring countries.
