Israel’s recovery loses some momentum at the start of Q3

ISRAEL - In Brief 20 Aug 2026 by Sani Ziv

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The Bank of Israel’s new monthly activity index declined by 0.12% in July, following a strong 15.4% annualized increase in Q2. The index is still 1.8% above its February level, pointing to a significant recovery in activity following the war with Iran. The three-month measure increased by 0.5%, above the economy’s long-term monthly growth trend of around 0.3%. The July decline partly reflected a sharp drop in both imports and exports following their strong increase in June. At the same time, the Bank of Israel estimates that credit card purchases increased by only 0.4% in July, following a 1.7% decline in June. The decline in the activity index and relatively weak credit card purchases suggest that growth slowed at the start of Q3 after the sharp Q2 rebound. Meanwhile, the government is considering an additional NIS 25bn in defense spending in 2026, which could raise the defense budget to around NIS 184bn. A broader increase of around NIS 350bn over the next decade is also under consideration. The planned increase reinforces the Bank of Israel’s fiscal concerns despite the decline in the 12-month deficit to 3.3% of GDP.Bank of Israel Monthly Index of Economic Activity Monthly, index 2010=100Source: Bank of IsraelBank of Israel Governor signals a hawkish stance on further rate cuts Governor Amir Yaron indicated yesterday that a September 1 rate cut is far from certain, pointing to inflation, the tight labor market, geopolitical uncertainty and fiscal risks. He expects inflation to move back towards 2% in the coming months, while economic activity has recovered strongly. The latest activity data provide some support for further easing, but the case for a September cut re...