Q2 GDP at 15.4% - Israel Blows It Out?
There’s more to the new numbers than meets the eye, we dig in here.
The second quarter rebound was real. It was also a recovery from a war quarter, with a portion of the growth booked from production that never sat in Israel.
Now that summer is almost over and children are back in school, it is time to turn our attention to the real economic situation in Israel. This week I reviewed the principal releases of the summer: the Central Bureau of Statistics second quarter accounts, reported by Globes on August 16, the IMF Article IV conclusions published on July 1 and the August Monthly Bulletin of Statistics. The headline is a 15.4% annualized expansion. The question worth asking is what that expansion actually measures.
Asaf Zagrizak's Globes report put second quarter GDP at 15.4% on an annualized basis, or 3.6% on the quarter, after a 2.2% contraction in the first. Most of the economists cited by Globes had expected a figure near 10%. The print exceeded that consensus. Business output rose 16.6% annualized, public consumption 19.5% and private consumption 14.7%. Exports of goods and services, excluding startups and diamonds, rose 25.2%. Imports excluding defense rose 22.7%. Fixed capital formation rose 6.3% annualized, with ICT investment up 181.4%. The bureau stated that the increase "reflects a major rise in private consumption data, public consumption and exports of goods and services," after "large declines in the first quarter of the year following the Iran war."
That is a recovery from a disrupted quarter. It is not, on its own, a new expansion.
The rebound that didn't cross the border
The 15.4% figure is accurate. It is also annualized. Annualize a quarter that is climbing out of a war and the result will look extraordinary. The CBS itself suggests a more stable comparison: the first half of 2026 against the second half of 2025. On that basis, growth is 3.2% annualized. Private consumption in that comparison is slightly negative. That is not a boom. It is a recovery that has not fully reached domestic demand.
Then there is the adjustment most readers will pass over. GDP excluding production abroad rose 14.4% annualized in the second quarter, or 3.4% on the quarter. The gap in a single quarter is one percentage point. Across the first half it is no longer a footnote. Headline growth of 3.2%, growth excluding production abroad of about 1%. The value of goods and services actually produced inside Israel barely increased.
The CBS describes this as exports that did not cross the country's borders: activity attributed to Israeli companies and recorded here, from plants located elsewhere. In practice that line has a name, and the name is Nvidia. Camtek and Nova appear in the same category. The greater part of it is Nvidia.
Governor Amir Yaron drew the same distinction this week. After the Bank of Israel cut the interest rate for a third consecutive time, to 3.25%, he told Globes that second quarter activity was strong, "but without production abroad, it is more moderate." Asked about the 15.4% print, he went further: "despite impressive growth figures in the second quarter, activity without production abroad is more than moderate." The Monetary Committee put a figure on it. "Excluding the activity of Israeli companies abroad, growth in the first half of the year was more moderate," it said, with second quarter GDP 3.8% higher than the last quarter of 2025 in annual terms. Globes noted that the Committee was referring to the "Nvidia effect": large companies registered in Israel that produce and sell outside the country, in a way that does not reflect the real economy. Yaron added that CBS revisions from the beginning of 2023 show "an annual rate of 1.8% in growth without production abroad," alongside moderate data in the export sector.
A rebound that registers in the national accounts and only partly materializes in the domestic economy. That is the rebound that didn't cross the border.
The year the IMF already marked
The IMF Executive Board completed its 2026 Article IV consultation on June 24 and published on July 1. Growth for 2026 was revised to 3.5% from 4.8% before the war in the Middle East, after "a sharp contraction in the first quarter followed by a modest rebound over the remainder of the year." The IMF projects 4.4% in 2027 if demobilization proceeds and foreign workers return. Placed beside the 15.4% quarter, the two figures are not in conflict. They describe different time horizons. The quarter is a rebound. The year is a 3.5% year, with downside risk still concentrated in the region.
The IMF expected inflation to rise temporarily on energy prices and supply constraints, even with shekel appreciation. The August bulletin does not yet confirm that path. July's consumer price index stood at 105.1, up 0.3% from June and 1.5% from July 2025, within the Bank of Israel's 1 to 3 percent target range. Through July, the price data remain contained.
The labor market is the clearer constraint. Seasonally adjusted unemployment in July was 3.1%, up from 2.9% in June, with 148,200 people unemployed and 4.4 million employed. Labor supply remains tight because of reserve duty and fewer non Israeli workers, and because participation among Haredi men and Arab women remains too low to support medium term potential. That is not a second quarter phenomenon. It is the ceiling on a 3.5% year.
The IMF's remaining priorities were fiscal. Rebuild buffers, rely on revenue rather than further reductions in already limited civilian spending and maintain a moderately tight, data dependent stance at the Bank of Israel. Directors also flagged banks' real estate exposures. A strong second quarter does not revise those conclusions.
Our view:
Do not annualize a rebound and treat it as a cycle. The 15.4% reading is what a war quarter looks like in reverse. Consumption, government outlays and exports contracted sharply in the first quarter and recovered in the second. That is arithmetic. It is not evidence of a new expansion.
style="font-family:Inter,'Helvetica Neue',Helvetica,Arial,sans-serif;font-size:18px;line-height:25.2px;color:#000000;margin:0 0 18px 0;font-weight:400;">The figure I would underwrite is the IMF's 3.5%, not the CBS annualized quarter. Even that 3.5% has a composition problem. If a growing share of GDP is production that never crosses the border, the tax base, employment and household income do not move the headline. Nvidia's Israel revenue is a geniuine national asset. It is a poor proxy for the pace of domestic activity.
