Israelis hope for potential economic 'peace dividend' after war with Iran

Israel's 12-day war with Iran last month has dented its economy but investors and Israelis are hopeful that a U.S.-brokered halt to hostilities could bring an economic "peace dividend" with the country's neighbours that has been a dream for decades.

Such hopes are fuelled by setbacks to Iran's nuclear programme and the weakening of Iranian allies in Lebanon, Syria and Gaza - despite the still-raging war in the Palestinian enclave. The optimism could be boosted further after U.S. President Donald Trump said Israel has agreed to the conditions needed to finalise a 60-day ceasefire in Gaza. There was no immediate official comment by either Israel or Hamas to Trump's statement.

Tel Aviv share indexes have surged by double digits to reach all-time highs since June 15, just two days into the war with Iran, while the shekel has appreciated 8% since June 13, hitting a more than two-year peak. Israel's risk premium, the cost of insuring government debt against default, has declined sharply, sparking talk of interest rate cuts as soon as August.

The relaxation of credit default swap levels means markets are no longer pricing in the risk that Israel could lose its investment grade credit rating, something that had been unthinkable before the Gaza war. Gil Dotan of the IBI Investment House said investors are anticipating "new opportunities that may arise with Israel's neighbours".

Underlying the optimism for the economy is what some analysts see as a reshaped Middle East that could ultimately lead to more peace deals with longtime enemies, such as Syria. In 2020 the United Arab Emirates and Bahrain established official diplomatic relations with Israel, later joined by Morocco, under the U.S.-brokered Abraham Accords. Hopes have been raised for the prospect of more countries joining.

Shmuel Abramzon, chief economist at the Finance Ministry, said: "We are witnessing an extensive situation of de-risking. We are removing an existential threat and also an economic threat, as well as geopolitical risks." HIT TO THE ECONOMY

The war with Iran will have a sharp short-term impact on the economy. The ministry is reassessing its 2025 growth forecast of 3.6% due to the estimated 8 billion shekels ($2.37 billion) in economic damage from the war, while J.P. Morgan has already lowered its growth projection to 2% from 3.2%.

Iranian missiles killed 28 people and damaged many buildings, according to Israeli authorities. Iranian authorities said more than 600 people were killed in Israel's attacks on nuclear and security targets. Israel's labour market has been robust but faces strain as many workers have been called into military reserve duty - ever since Israel mounted its offensive in Gaza after the deadly attack by Palestinian militant group Hamas on Israel on October 7, 2023.

The Iran war disrupted key industries and Israel's Statistics Bureau said 35% of businesses reported an expected hit of more than 50% on their company's revenue in June. Restaurant owner Tzvi Maller likened the brief war to a re-run of the COVID pandemic, saying he limited his business - Mojo's in the heart of Jerusalem - to deliveries and takeout before reopening.

In fact his business has been hit since the October 7 attacks, he said, adding that since then, "we have all been suffering" with the lack of tourists. Local customers and his own additional investment had kept his business alive, Maller said, adding he trusted it would survive somehow. The Holmes Place fitness chain of 74 gyms closed during the war but when it ended attendance and new memberships surged, said CEO Keren Shtevy, as people sought a return to normal life.

Israel's Oil Refineries was hit by an Iranian missile and was forced to close temporarily. The offshore Leviathan natural gas field was shut during the war, losing some $12 million in export revenue from neighbours Egypt and Jordan. Despite widespread business closures, 95% of Israeli factories stayed open during the 12 days, according to Ron Tomer, head of Israel's Manufacturers' Association, who said exporters had carried on serving international clients.

Bank of Israel head of research Adi Brender said defence spending could fall in coming years. "The need for a very intensive defence expenditure, which is targeted towards Iran, would no longer be required in the coming years," he told Reuters. RESILIENT ECONOMY

Karnit Flug, a former Bank of Israel Governor and now a senior fellow at the Israel Democracy Institute, said: "Before this episode with Iran we were generally positively surprised with the resilience of the economy given the very long war with Gaza." The economy grew an annualised 3.7% in the first quarter. Israel's economy still has lingering issues such as the high cost of living and the non-participation of ultra-Orthodox Jewish men in the workforce, Flug said.

"These long-term challenges have not gone away," she said. The 20 months of conflict in Gaza have constrained growth, pushed up prices and sharply boosted defence and other spending as well as the debt burden.

However, the country's main economic driver, its high-tech sector that accounts for 20% of activity, has been booming. Startup Nation Central said on Monday that tech firms raised more than $9 billion in the first half of 2025, the sector's best six-month period since 2021 and up 54% over the second half of 2024. Startups raised $12 billion in all of 2024. Jon Medved, chief executive of investment firm OurCrowd, said foreign investors remain committed to Israel, particularly in sectors like artificial intelligence and cybersecurity, and that could surge if Iran's nuclear programme were dismantled.

($1 = 3.3738 shekels)

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