War is bad for business. Turns out, the end of the worst of it is very good.
Israel's economy just posted its strongest growth in years, bouncing back from a rough start to 2025 with numbers that blew past what forecasters expected.
The country's gross domestic product, or the total value of everything it produces, expanded at a 15.4% annualized rate in the second quarter, according to a Sunday report from the Central Bureau of Statistics. That means if the economy kept growing at that pace for a full year, it would grow by that much.
Economists were not expecting anything close to that. A Bloomberg survey of eight forecasters had a median estimate of just 8.3%.
The rebound comes after a miserable first quarter, which was revised to a 2.2% contraction. So the economy shrank early in the year, then snapped back hard.
Exports led the charge, climbing 35.2% as demand for Israeli goods and services bounced back. Government spending rose 19.5%, private consumption grew 14.7%, and fixed capital formation, which is basically money spent on buildings and equipment, gained 6.3%.
The first quarter's dip was tied directly to the war with Iran, which disrupted trade and scared off investment. As tensions eased, the economy started moving again.
Ronen Menachem, chief markets economist at Mizrahi Tefahot Bank Ltd., called the report "fundamentally encouraging." He noted that while everyone expected a rebound, its strength was a surprise, especially since the first quarter's contraction was less severe than many feared.
That stronger-than-expected start to the year prompted the central bank to raise its growth forecast for 2025 to 4% last month. For 2027, it sees growth of 5.5%.
But Menachem added a word of caution. The data contains a lot of "noise," he said, making it hard to draw firm conclusions about the long-term trend. One strong quarter does not guarantee the next one will look the same.
The central bank's next rate-setting meeting is scheduled for September 1st, and these GDP figures will be a key factor in that decision. In the previous month, the bank reduced its benchmark rate to 3.5%, the lowest level since late 2022. The base rate is the benchmark the bank uses to influence borrowing costs across the economy. It left the door open to more cuts.
The case for cutting rates just got stronger. Inflation is cooling, with consumer prices in July up just 1.5% from a year earlier, down from 1.6% in June. That is the second straight month of easing price pressures.
Menachem said the GDP report "does not create an urgent case for imminent interest rate cuts," but he expects the bank to weigh the data carefully alongside the cooler inflation numbers.
The bottom line: The war's economic damage is healing faster than expected, and the path is clear for lower rates.
For investors, this is a story about a country getting back on its feet. The rebound shows that even after a sharp shock, an economy can recover quickly when the conflict fades.
The bigger question is whether the growth can hold. One quarter of strong numbers does not erase the risk of renewed tensions or global slowdowns. But the combination of strong growth and falling inflation is the kind of setup that tends to support both stocks and bonds.
If the Bank of Israel cuts rates again in September, borrowing gets cheaper for businesses and consumers, which could keep the momentum going. If inflation stays low and growth stays solid, the recovery could have legs.
For now, the numbers say Israel's economy is moving forward again. The war's economic scars are real, but they are healing faster than almost anyone expected.
