Israel in 2025 continues to surprise global observers. In a year marked by intensive fighting, diplomatic pressure, and persistent uncertainty, international investors signaled confidence rather than caution. According to a Bloomberg review, foreign investors committed $60 billion to purchase more than 85 Israeli companies – the highest figure ever recorded.
The TA-35 reached a historic peak, foreign funds added hundreds of millions of dollars in Israeli exposure, and the shekel strengthened 26% against the US dollar, more than any other freely traded currency. Beneath these milestones, however, lies a striking paradox.
Israel is simultaneously one of the strongest financial economies in the world and one of the weakest developed economies in terms of physical infrastructure.
Outperforming US benchmarks
On the one hand, it has a capital market outperforming US benchmarks, a globally competitive tech sector, a resilient currency, and an economy that continues to demonstrate exceptional adaptability even during wartime.
On the other hand, it has an outdated infrastructure, planning permissions and building procedures that stretch across years, a transportation crisis that suppresses productivity, energy and construction bottlenecks, and rapidly rising defense expenditures.
These two realities are not parallel; they collide. That collision will determine whether Israel breaks through to a $1 trillion GDP or remains stuck.
Young and open economy
With a population of roughly 10 million, one of the youngest in the Western world, Israel benefits from a large and expanding labor force. Its $580 billion nominal GDP and $58,000 GDP per capita reflect how far the country has come. The past two years have reaffirmed the strength of the tech sector, with approximately $12 billion in investments flowing into Israeli hi-tech companies.
Yet the productivity gap is unmistakable. Productivity in the tech sector is high and improving, while productivity in most other sectors – construction, transportation, services, commerce, and traditional manufacturing – remains significantly lower. This imbalance pulls down national output and limits long-term growth.
The capital market tells a different story. Strong management in banking, insurance, and retail, combined with relatively attractive valuations, helped propel the Tel Aviv Stock Exchange (TASE) ahead of leading US indices. Capital inflows reflect global confidence, but financial strength cannot compensate for physical weaknesses indefinitely.
Signals for the future
Israel’s interest-rate environment is complex. With real interest rates estimated at around 2%, the economy is structurally positioned for future rate reductions in the coming years. Such moves could bolster long-term bonds, ease household burdens, and help revive investment momentum.
The shekel’s stability, even under wartime pressure, underscores the depth and resilience of Israel’s economic structure. Its strength is tied to the tech sector’s global reach, consistent foreign-currency inflows, and robust export activity. All this highlights the central contradiction: The financial economy is thriving, while the physical economy lags.
Not by technology alone
The tech sector employs only 10 to 15% of Israel’s workforce. To double its GDP, Israel must raise productivity in the broader economy: construction, transportation, energy, industry, logistics, and the public sector.
Infrastructure represents the most binding constraint. Major transportation and energy projects can take a decade or longer to complete. Building permits often take years. Productivity in the construction sector lags far behind Western benchmarks, and delays in national infrastructure projects impose heavy costs, as much as 0.1% of GDP for every month of delay in major projects.
Demographic growth, one of Israel’s greatest advantages, also comes with risks. A young population drives economic expansion only when paired with high-quality education, training, and access to productive jobs. Without this, the demographic dividend can quickly become an economic burden.
Adding to these structural challenges are the rising costs of defense, reconstruction, and compensation – resources diverted from long-term growth investments. Without a real shift in national priorities, Israel risks moving forward while dragging increasing structural weight.
The necessary shift
To reach $1 trillion, Israel must fundamentally change how it governs its economy. A model focused on managing a budget and distributing transfer payments cannot fuel the next stage of growth. Israel must become a state that invests directly and aggressively in physical infrastructure, human capital, energy, and technology.
This means shifting resources toward advanced transportation systems and rail; a modernized energy infrastructure; solar and natural-gas expansion; digital governance and unified permit allocation; and urban planning that supports density and productivity.
Regulation must shift from being a barrier to becoming a national asset.
Energy is now a strategic bottleneck. Data centers, AI infrastructure, and semiconductor fabrication demand massive increases in electricity capacity. Israel will need to expand gas production, scale up solar output significantly, and evaluate micro-nuclear technologies to ensure long-term energy security.
Regionally, Israel must continue deepening its economic ties with the Gulf states, Greece, Cyprus, and India. Integration with these blocs can strengthen supply chains, open markets, and anchor Israel as a technological and financial hub in the Eastern Mediterranean
A critical decision
Israel is at a historic crossroads. It has strong companies, a resilient currency, a sophisticated capital market, and deep integration with global technology. Yet it also has aging infrastructure, heavy bureaucracy, rising security costs, demographic complexity, and weak execution capacity.
The $1 trillion target is realistic, but only if Israel transforms into an economy driven by execution, investment, and long-term planning. The question is not whether Israel can reach the milestone – it clearly can –but whether it will choose the structural reforms necessary to get there.
If it builds, invests, and modernizes, Israel will not only reach $1 trillion, it will exceed it. If it does not, it risks remaining a high-potential economy constrained by the very systems meant to support it.
The writer, an IDF major (res.) is a serial entrepreneur, venture capital investor, and host of The Owl (Ha-Yanshuf) podcast.