Israel's Economy Grows on War Spending, Citizens May Pay the Price

Israel's economy showed strong growth in the second quarter, with GDP rising 14.9% year-on-year, according to revised data from the Central Bureau of Statistics (CBS) released September 16. While initially estimated at 15.4%, the revised figure still indicates a robust recovery following the spring war. However, a closer look reveals that a significant portion of this growth was driven by increased government, particularly defense, expenditures, while exports and investments were weaker than previously thought.

Revised export growth, excluding high-tech, was adjusted down to 16.6% from 25.2%. When excluding overseas production by Israeli companies, the figure drops to just 8.7%. Investment growth was also revised downward to 4.1% from 6.3%, with particular reductions in machinery and equipment. Even the booming IT and communication technology sector saw its growth revised from 181.4% to 152%.

In contrast, government spending saw its growth revised upward from 19.5% to 22.2%, with defense spending increasing by 19.8%, up from an earlier estimate of 14.7%. This shift indicates a less balanced recovery than initially reported, with the state playing a more prominent role in economic activity.

This reliance on government spending echoes patterns seen during previous conflicts. For instance, in 2024, Israel's GDP grew by only 1%, largely due to a 13.7% increase in government spending, while investments and exports contracted. At that time, the head of macroeconomics at CBS, Oz Shimoni, noted that without increased government spending, the economy would not have grown at all, and GDP per capita actually decreased.

While the current second-quarter figures do not definitively signal an economy dependent on military spending, sustained high defense expenditures after major conflicts can temporarily boost GDP. The long-term sustainability of the recovery will depend on whether private sector growth, particularly in investments and exports, accelerates in subsequent quarters. The article draws a parallel with Russia, where large military orders contributed to GDP growth but also led to increased competition for resources between the state and civilian sectors.