Israel's Economy Grows Slower Than Expected in Q2, Driven by Government Spending

Israel's economy experienced a rebound in the second quarter, with annual growth reaching 14.9% after a previous contraction, though this pace is slower than earlier estimates. The growth was significantly influenced by a substantial increase in government spending, particularly on security, which rose 19.8% annually. Overall public consumption expenditure increased by 22.2% year-on-year.

While exports of goods and services (excluding startups and diamonds) grew 16.6% annually, imports surged by 24.4% in the same period. This indicates that imports grew faster than exports, partly due to a recovery in domestic demand, but also suggesting that some of this renewed demand was met by foreign goods rather than local production.

Private consumption also saw a recovery, rising 15% annually after a decline in the first quarter, and investment in fixed assets increased by 4.1%. However, when looking at the first half of the year, the picture is more moderate. GDP grew 3.5% compared to the second half of 2025, but growth excluding certain multinational company activities was only 1.1%.

Experts caution that the high Q2 growth rate should be viewed in the context of recovery from a prior slump. The continued high level of government spending, especially on security, poses fiscal challenges, potentially increasing deficits and debt, and limiting resources for civilian and public investment. The key question moving forward is whether the private sector, exports, and investment can sustain economic activity once the rebound effect fades.