Israel’s War With Iran Threatens to Erase Its Economic Recovery, Costing Up to $3 Billion a Week

Israel’s Finance Ministry has warned that the escalating air war with Iran threatens to inflict weekly economic damage of more than 9 billion shekels — roughly $2.93 billion — on an economy that had only just started to regain its footing after two gruelling years of conflict in Gaza. The assessment, contained in a letter from Finance Ministry Director General Ilan Rom to Home Front Command chief Maj. Gen. Shai Klapper, underscores just how quickly the new front with Tehran has the potential to derail a carefully rebuilt recovery.

Under the current “red” alert level imposed by the Israel Defence Forces’ Home Front Command, the weekly economic loss is estimated at 9.4 billion shekels — a figure that accounts for workplace shutdowns, school closures, the mobilisation of reserve soldiers, and severe restrictions on movement. The restrictions limit travel to workplaces, order the closure of educational institutions, and have seen most of the workforce shift to remote arrangements, with essential services the only category permitted to operate in person.

In the letter, Rom made an explicit plea for a shift to an “orange” alert level — a less restrictive framework that would allow businesses and workplaces to operate provided they are located near protected spaces such as shelters. Under orange-level rules, educational institutions would remain closed, but commercial activity could resume more broadly. The Finance Ministry estimates that this shift alone could reduce weekly economic losses to approximately 4.3 billion shekels — less than half the damage projected under the current red-level restrictions.

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“There is no dispute about the need to preserve a defence policy adapted to the security situation, but at the same time, shutting down the economy on a broad scale carries heavy economic costs,” Rom wrote, according to reporting by The Times of Israel. He added that a “balanced approach” was needed — one that could address both security requirements and economic stability simultaneously.

A Recovery in Jeopardy

The timing of the conflict is particularly painful from an economic standpoint. Israel’s economy had emerged from the Gaza war battered but resilient. Official data published in February 2026 showed that GDP grew 3.1% in 2025, rebounding sharply from a sluggish 1% pace in 2024 — a year defined by the full weight of the war on Palestinian militant group Hamas in Gaza. The 2025 recovery was driven by a 7.1% rise in investment and a 5.9% gain in exports, complemented by a modest uptick in consumer spending and heavy state defence expenditure.

In the fourth quarter of 2025, GDP grew at an annualised rate of 4.0%, powered by a dramatic 33% surge in exports following the October ceasefire between Israel and Hamas. Third-quarter GDP was revised upward to an annualised rise of 12.7%, defying earlier estimates of 11.1%. The performance beat consensus forecasts by a wide margin and prompted analysts to speak of a genuine, broad-based recovery taking hold.

The Bank of Israel had projected 5.2% growth for 2026 — a figure that assumed the Gaza ceasefire would hold and geopolitical conditions would remain relatively stable. The OECD, in its December 2025 global economic outlook, forecast 4.9% growth for Israel in 2026, predicting that private-sector expansion would lead the charge as military expenditure contracted and supply constraints eased. The IMF’s own projection sat at 3.9% growth for 2026. All of those figures now face significant downward revision.

“The economy is recovering,” Yonie Fanning, chief strategist at Mizrahi Tefahot Bank, had said just weeks before the outbreak of the Iran conflict. The trade balance data, he said, “sets the basis for continued recovery.” That trajectory has been abruptly interrupted.

War Breaks Out on a New Front

Israel and the United States began bombing Iran on Saturday, February 28, triggering a wave of retaliatory strikes across Israel and the wider Middle East. The joint campaign was described by U.S. President Donald Trump as aimed at eliminating Iran’s nuclear and missile programmes, and potentially weakening its leadership as a prelude to regime change. U.S. and Israeli officials said the campaign could last weeks.

The immediate domestic consequences were severe. Schools across Israel were ordered closed. Public gatherings were banned. Workforce activities were prohibited except for essential services. The IDF Home Front Command, on Monday, extended the nationwide restrictions until Saturday night, citing a fresh assessment of the security situation. Malls stand shuttered, the Ayalon highway in Tel Aviv has been largely deserted, and the economic pulse of the country has effectively flatlined under wartime conditions.

The Manpower Group Israel CEO Dror Litvak urged employers to act despite the disruption. “Employers who have a safe space can and should open their workplaces and make it clear to employees that the door is open if they want to come back,” he said, reflecting growing pressure from the business community to find ways to maintain activity within the constraints.

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The Regional and Global Energy Shock

The conflict has reverberated far beyond Israel’s borders. Oil prices surged sharply in the days following the strikes, with West Texas Intermediate rising roughly 8% to around $72.79 a barrel, while Brent crude climbed to $79.41 a barrel — a 9% jump from its pre-conflict trading price. Traders priced in expectations that Iranian oil exports, and potentially the wider flow of Gulf energy, would be disrupted.

At the centre of global concern is the Strait of Hormuz — the narrow waterway between Iran and Oman through which roughly 20 million barrels of oil per day transit, according to the U.S. Energy Information Administration. That figure represents approximately one-fifth of daily global oil production. The strait also handles around 20% of global LNG exports, most of which head to Asian markets including China, Japan, India, and South Korea.

Tanker traffic in the strait fell by roughly 70% after the initial escalation, leaving more than 150 vessels waiting outside the corridor due to safety risks. Reports from the United Kingdom Maritime Trade Operations flagged “significant military activity” in the Strait and an incident just two nautical miles north of Oman’s Kumzar. Rystad Energy’s head of geopolitical analysis described an “effective halt of traffic” through the waterway.

The Columbia University Center on Global Energy Policy noted that gas markets are facing a triple disruption: LNG transiting through the Strait has been disrupted since February 28; Israel has halted gas production at its Karish and Leviathan fields, affecting pipeline exports to Egypt and Jordan; and Iranian pipeline exports — primarily routed to Turkey — are under threat. Together, these disruptions could amount to around 130 billion cubic metres on an annualised basis.

Capital Economics climate and commodities economist Hamad Hussain warned that if crude oil prices were to rise to $100 per barrel and sustain at those levels, the effect could add 0.6–0.7% to global inflation — a scenario that would complicate the work of central banks across the world that are already navigating an uncertain global growth environment.

In response to the crisis, OPEC+ announced it would boost production by 206,000 barrels per day starting in April — more than analysts had anticipated. However, energy experts were sceptical that additional supply would provide meaningful relief if the Strait of Hormuz remained a contested corridor. As Rystad’s Jorge León noted, “markets are more concerned with whether barrels can move than with spare capacity on paper.”

A Nation Holding Its Breath

The economic paralysis gripping Israel reflects both the physical scale of the threat — with Iranian missiles striking residential buildings in Tel Aviv and Jerusalem — and the logistical challenge of sustaining any semblance of normal commercial life under an active aerial campaign. The Home Front Command’s red-level restrictions are among the most restrictive ever imposed on the Israeli civilian economy, comparable in scope to the early days of the COVID-19 lockdowns.

The Finance Ministry’s figures do not capture the full picture. They measure lost economic activity — foregone production, shuttered businesses, idle workers. They do not account for physical damage to infrastructure, the long-term effect on foreign investment sentiment, or the reputational toll on a country that had been working hard to reassure global business partners after the Gaza conflict. The OECD had specifically noted that the Gaza ceasefire was expected to reduce hesitancy among companies doing business with Israel — a dynamic now under severe pressure.

The longer the conflict persists, the harder the arithmetic becomes. If the war endures for even four weeks at current red-alert restrictions, the cumulative economic loss could approach 38 billion shekels — roughly $12 billion — before any account is taken of the energy shock rippling through the region. If the Finance Ministry’s push for orange-level restrictions succeeds, the four-week toll drops to approximately 17 billion shekels, still an enormous burden for an economy that had been banking on a year of accelerated recovery.

Finance Minister Rom’s letter captures the underlying tension with precision: Israel faces simultaneous imperatives — to protect its civilian population from a hostile air campaign, and to keep the economic engine running well enough to fund a war effort that its own officials say could extend for weeks. Balancing those two demands, with no clear end in sight, will define the economic story of 2026.

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By: Montel Kamau

Serrari Financial Analyst

6th March, 2026