TEHRAN -- Israel’s fragile economy is facing a severe downturn amid escalating regional hostilities, with devastating missile strikes from Iran and a Yemeni naval blockade delivering a crippling blow. 
The aftermath of these strikes has pushed the Israeli economy into deeper contraction, exposing vulnerabilities in infrastructure, investor confidence, and consumer markets.
The economic data paints a stark picture. In the second quarter of 2025, Israel’s gross domestic product (GDP) shrank by 3.5% year-over-year, according to the Israeli Central Bureau of Statistics. 
This marks a significant deceleration from earlier growth estimates, directly linked to the fallout from a 12-day war involving Iranian missile strikes, followed by sustained attacks from Yemeni armed forces. 
Commercial GDP, which measures business activity, fell an even sharper 6.2%, signaling a deepening slump in Israel’s core economic engine. Per capita GDP—a measure of average economic well-being—declined by 4.4%, underscoring how ordinary settlers are bearing the brunt of this instability.
The missile attacks inflicted widespread damage across Israel’s densely populated areas and critical infrastructure. During the 12-day war with Iran in mid-2025, nearly 39,000 buildings were damaged, thousands of which were residential units destroyed or rendered uninhabitable. 
Compensation claims have surged, with approximately 10,000 claims filed specifically for missile-related damage. Total war-related damage costs from this war are estimated to have reached $650 million, with forecasts suggesting that combined losses from ongoing hostilities—including Yemeni missile attacks—could more than double to around $1.3 billion.
These strikes exposed critical failures in Israel’s air defense systems, which had long been regarded as robust. The vulnerability revealed by these attacks shook both public confidence and investor sentiment, undermining the Zionist regime’s image as a secure place to live and do business.
The subsequent Yemeni missile attacks have compounded the damage, creating a persistent security challenge. This ongoing barrage has strained emergency response systems, prolonging economic uncertainty.
The real estate sector, a cornerstone of Israel’s economy, has been hit particularly hard. June 2025 saw the lowest apartment sales volume since the early 2000s, with only 5,844 units sold nationwide. 
This represented a 29% year-over-year decline and a 13% drop from May 2025, reflecting mounting concerns about security and economic stability. Real estate prices, which had been buoyed by steady demand, are now under pressure as buyers hesitate amid fears of further war and damage.
The shrinking real estate market has ripple effects across industries, including construction, finance, and retail, further contributing to the broader economic contraction.
The war-induced disruptions have also translated into significant labor market challenges. Worker absenteeism jumped sharply, reaching 7.9% in June 2025 from a mere 0.8% in May, according to the Israeli ministry of labor. This spike was driven by a combination of financial hardships—causing workers to take leave or seek alternative income sources—and compulsory reserve military duty, which removed tens of thousands from the civilian workforce.
With approximately 360,650 workers absent in June alone—of which nearly 300,000 were absent for financial reasons and around 56,000 for reserve duty—businesses have faced serious productivity losses. Many sectors, particularly small and medium enterprises, have struggled to operate efficiently, compounding the economic slowdown.
Israel’s ministry of finance and tax authority have implemented compensation programs aimed at cushioning the economic blow. Notably, a new online system facilitates claims for lost rental income, targeting private landlords whose properties have been damaged or rendered unusable by missile strikes.
However, the administrative burden of processing tens of thousands of claims—and the scale of damage—presents significant fiscal and bureaucratic challenges. The compensation costs, along with emergency reconstruction efforts, place further strain on the entity’s budgets already stretched thin by military expenditures.
In response to the war, Israel’s ministry of finance revised its 2025 growth forecast downward from an earlier 3.6% estimate to 3.1%, highlighting the pervasive impact of regional instability. Analysts warn that unless the security situation improves, growth projections could be revised down further.
Investor confidence, already fragile due to Israel’s political turbulence and ongoing war with Palestinians, has taken another hit. The uncertainty created by Iranian and Yemeni missile attacks has raised the risk premium associated with Israeli assets, potentially triggering further capital flight.
The United States remains Israel’s financial backstop, providing $3.8 billion annually in military aid under a decade-long memorandum of understanding signed in 2016, as well as significant loan guarantees. Additional emergency supplemental appropriations passed by the U.S. Congress in 2024—totaling $26.4 billion—have helped cushion Israel’s military budget and, by extension, its economy.
Yet, even this unprecedented financial support has limits. The structural damage to infrastructure and the human toll of war weigh heavily on the economy’s capacity to rebound. Continued military escalation risks overwhelming fiscal buffers, particularly as domestic unrest and international divestment campaigns gather momentum.
Israel’s economic woes are symptomatic of a broader regional fragmentation. The escalating missile campaigns from Iran and resistance 
movements reflect a shift toward asymmetrical warfare amplify economic vulnerability of the occupying regime. 
The sustained economic and security challenges underscore a critical juncture. Israel faces the twin risks of economic stagnation and deeper social fracturing unless a path to de-escalation emerges. Meanwhile, regional actors are leveraging missile attacks as strategic tools to inflict economic damage, signaling a new era of hybrid warfare with profound implications for Israel - the odd man of West Asia.