Israel’s economy has taken a sharp and unexpected downturn, shrinking by 3.5% in the second quarter of 2025, as revealed by the country’s Central Bureau of Statistics on Sunday. The contraction, which came as a surprise to most analysts, is being directly attributed to the disruptive impact of the 12-day war with Iran in June—a conflict that not only shuttered businesses but also rattled investor confidence and upended daily life for millions.
For many Israelis, the numbers are more than just statistics—they’re a reflection of a society that, for nearly two weeks, was brought to a standstill. According to Bloomberg, the 3.5% drop in annualized, seasonally adjusted gross domestic product (GDP) was far worse than the median estimate of 0.2% growth predicted by a survey of six economists. The scale of the economic shock became apparent as details emerged: from April to June, Israel’s business sector shrank by 6.2%, private consumption fell by 4.1%, public spending dropped 1%, and investment in fixed assets plunged a staggering 12.3%.
Exports of goods and services—excluding the often-volatile sectors of startups and diamonds—declined by 3.5%, while imports (excluding defense purchases) actually rose by 3.1%. The figures paint a sobering picture of an economy reeling from a sudden and severe interruption. As TRT World noted, the war’s impact was not limited to the battlefield; it struck at the heart of Israel’s economic engine, undermining both consumer confidence and business investment.
The roots of this economic turmoil trace back to June 13, 2025, when Israel launched attacks on several of Iran’s military and nuclear sites. Iran’s immediate response was to unleash a barrage of missile strikes, forcing many Israelis to seek refuge in bomb shelters and effectively halting normal business operations across large swathes of the country. The United States entered the fray on June 22, launching its own airstrikes on Iran’s nuclear facilities at Fordow, Natanz, and Isfahan. The fighting finally came to a halt on June 24, when a US-brokered ceasefire took effect, ending the 12-day conflict—but not before the economic damage had been done.
Bank of Israel Governor Amir Yaron, speaking to Bloomberg in late June, offered a blunt assessment of the cost: "The fighting was likely to cost nearly $6 billion or 1% of GDP." Others, such as analyst Andreas Krieg, suggested the overall losses could be even more severe, estimating a total hit of between $11.5 billion and $17.8 billion—amounting to 2% to 3% of Israel’s entire economy.
It’s not just the headline GDP figures that tell the story. The underlying components reveal the breadth of the downturn. Private consumption, a key driver of economic growth, dropped by 4.1%, reflecting both the immediate impact of the conflict and lingering uncertainty among households. Public spending, often a stabilizing force during crises, fell by 1%. Perhaps most concerning for policymakers was the 12.3% plunge in investment in fixed assets, signaling a sharp loss of confidence among businesses and investors alike.
The export sector, typically a pillar of Israel’s economy, was not spared either. Exports of goods and services (excluding startups and diamonds) declined by 3.5%, while imports rose by 3.1%—a combination that further widened the trade deficit and put additional pressure on the currency. For a country that prides itself on technological innovation and export-driven growth, these figures were particularly alarming.
The war’s impact, however, was not confined to Israel. Iran, too, suffered significant economic losses as a direct result of the fighting. Krieg told TRT World that Iran’s direct and indirect losses could total between $24 billion and $35 billion—equivalent to 6% to 9% of its $380 billion GDP. The conflict dealt a heavy blow to Iran’s trade, with non-oil exports in June falling to $3.4 billion, a 34% drop compared to a year earlier, according to Iranian customs statistics.
Iran’s digital economy was also battered by the war. The country’s communications minister reported a 30% contraction in the sector, with losses amounting to 150 trillion rials (about $170 million) in a single month. The minister attributed much of the damage to widespread internet restrictions imposed during the fighting, which crippled businesses and cut off millions from essential online services.
For both countries, the economic fallout from the brief but intense conflict has been severe and far-reaching. In Israel, the sudden contraction has raised difficult questions about the resilience of the economy and the government’s ability to respond to future shocks. The scale of the downturn has also fueled debates among policymakers, business leaders, and ordinary citizens about the true cost of military action and the long-term consequences for growth and stability.
On the streets of Jerusalem, Tel Aviv, and Haifa, the effects of the downturn are palpable. Many businesses remain shuttered or are operating at reduced capacity. Consumer sentiment is subdued, with households wary of making major purchases or investments in the face of ongoing uncertainty. The real estate market, often a bellwether for broader economic trends, has also cooled, with both buyers and sellers adopting a wait-and-see approach.
Meanwhile, in Tehran, the government faces mounting pressure to address the economic damage, particularly in sectors like digital services and non-oil exports that are vital for long-term growth. The sharp drop in trade and the contraction of the digital economy come at a time when Iran is already grappling with international sanctions and internal economic challenges.
For international observers, the events of June 2025 serve as a stark reminder of how quickly geopolitical tensions can translate into economic upheaval. The rapid escalation and subsequent ceasefire, brokered by the United States, may have prevented a wider conflict, but the economic scars will take far longer to heal. As both Israel and Iran take stock of the damage, the world watches closely, keenly aware that the next round of tensions could bring even greater risks—not just for the region, but for the global economy as well.
The numbers may be sobering, but they also carry a lesson: in an interconnected world, the costs of conflict extend far beyond the battlefield, shaping the fortunes of nations and the lives of ordinary people in ways that are both immediate and profound.
