Israeli Economy Recovers Faster Than Expected After Iran Conflict but Underlying Growth Remains Modest

Israel's economy rebounded more quickly and strongly from the second Iran war, dubbed "Roar of the Lion," than it did from the first conflict, "With a Dog." According to the Central Bureau of Statistics (CBS), GDP grew by 3.6% in the second quarter of 2026 compared to the previous quarter, equating to an annualized rate of 15.4%, following a 0.6% decline in the first quarter. This growth rate exceeded expectations, with JPMorgan economists forecasting no more than 11%. However, CBS cautions that this figure reflects an annualized quarterly rate and not sustained growth.

Comparing half-year periods, CBS recommends evaluating the first half of 2026 against the second half of 2025, yielding a more moderate annualized growth rate of 3.2%. Despite the recent war in the first half of 2026, GDP per capita rose 3%, surpassing 44,000 shekels (2020 prices, seasonally adjusted) for the first time. Business GDP, a key indicator of non-governmental activity, increased by 4.7%. Exports of industrial goods (excluding diamonds) surged 55.2%, investment in information and communication technology rose 181.4%, public consumption increased 19.5%, private consumption 14.7%, and imports 27%.

However, when comparing half-year to half-year, public consumption barely changed (0.5%), private consumption slightly declined, and total final consumption fell by 1.4%. Imports grew sharply by 22.1%, outpacing exports at 14.8%. Notably, tourism-related service imports (mainly Israelis traveling abroad) dropped 33%, indicating the import surge is not due to increased outbound travel. Private consumption patterns reveal households increased spending on durable goods like cars and appliances while reducing spending on essentials such as food, housing, and utilities.

A significant structural shift is evident in GDP excluding "net exports" produced abroad by multinational contractors, known as the "Nvidia" effect. While the second quarter showed a minor difference (15.4% vs. 14.4%), the half-year comparison reveals growth of 3.2% versus only 1.0% when excluding this component. This suggests that much of the growth during wartime stems from foreign-based production linked to Israeli companies, which continues unaffected by domestic conflict, while local economic activity remains subdued.

Since mid-2024, the share of this foreign-linked export component in GDP rose from 2% to about 5%. This growing divergence means reported GDP figures are more stable than the underlying domestic economy. The true test will be the third quarter of 2026, the first in a year without war or recovery effects. If core private consumption does not resume growth then, the recent rebound will be seen as a temporary catch-up rather than a new growth trend.