What does Psalm 118:2 mean?

This seems to be part of a "call and response." This is when a service leader uses a phrase, and the worshippers repeat a certain response. Here, the psalmist uses the Hebrew word hesed. That term describes a steady, unfailing, intimate, and loyal love. This is part of how God presents Himself to His creation (Exodus 34:6). God's loyal love for Israel was shown in the nation's survival despite conquest and exile (Ezra 2:1; Jeremiah 29:11).

Here, the call to praise is directed at the nation of Israel.

The Lord never stops loving His people. Even when believers sin and He disciplines them, the discipline is an act of love. God's intent is to make us better, not bitter (Hebrews 12:5–11; Revelation 3:19).