Israel's Economy Shows Strong Recovery in Q2 2026 but Faces Caution Over Sustainability

Israel's economy experienced a notable recovery in the second quarter of 2026, with private consumption rising by 3.5% and public consumption increasing by 4.6% compared to the previous quarter. Investments in fixed assets, including construction, equipment, and transportation, grew moderately by 1.5%, while exports of goods and services (excluding startups and diamonds) expanded by 5.8%. However, a broader comparison between the first half of 2026 and the second half of 2025 reveals a more moderate annual GDP growth rate of 3.2%. During this period, private consumption slightly declined by 0.4%, fixed asset investments rose by 10.6%, and exports increased by 14.8%.

Ronen Menachem, chief market economist at Bank Mizrahi-Tefahot, described the Q2 GDP report as encouraging, noting that the growth was stronger than expected and driven primarily by business sector expansion. Nevertheless, he cautioned against overinterpreting the quarterly data due to unusual fluctuations caused by the recent war, which complicate predictions for the rest of the year. Menachem also emphasized that the strong GDP figures alone do not justify further interest rate cuts in the near term, although the Bank of Israel will consider moderate inflation data in its decisions.

Overall, the second-quarter data indicate a rapid and robust recovery following early-year disruptions, but much of the growth stems from a very low comparison base. The 15.4% quarterly increase does not represent a sustainable growth rate. The wider economic picture remains positive but considerably more moderate, and given the volatility, it is still too early to determine the economy's growth trajectory for the remainder of 2026.