Bank of Israel Splits Growth Forecast, Highlighting Two Separate Economies
Translated & summarized from Calcalist by baba
The Bank of Israel has bifurcated its economic growth forecasts for the first time, distinguishing between overall GDP and growth excluding production by Israeli companies abroad. This "with Nvidia and without Nvidia" approach highlights that foreign production inflates Israel's GDP figures, masking slower domestic economic activity. While overall growth is projected at 5.6% for 2026, excluding foreign output lowers it to 3.4%, suggesting the nation's debt-to-GDP ratio may be artificially decreasing. The central bank credits the public and firms, not the government, for the economy's surprising resilience amidst ongoing conflicts.
The story in 5 lines · by baba
- Bank of Israel unveiled separate growth forecasts, one including and one excluding foreign production.
- Foreign production inflates Israel's projected GDP growth significantly, masking domestic economic reality.
- Excluding foreign output, Israel's 2026 GDP growth forecast drops from 5.6% to 3.4%.
- The debt-to-GDP ratio may be artificially decreasing due to inflated GDP from foreign production.
- The central bank credits the public and firms for the economy's resilience, not the government.
Bank of Israel has, for the first time in its history, presented two distinct economic growth forecasts: one including production by Israeli companies abroad and another excluding it. This division, likened to "with Nvidia and without Nvidia," signifies the central bank's assertion that Israel currently operates with two separate economies. Only one of these truly reflects the conditions for employees, consumers, and the labor market.
Production abroad, defined as goods developed in Israel, manufactured by overseas subcontractors, and sold locally without crossing borders, is projected to surge from 1.7% of GDP in 2023 to 5.8% by the second quarter of 2026. This contribution inflates the official growth forecast to 5.6% in 2026 and 7.5% in 2027, significantly exceeding IMF projections. However, excluding this foreign production component, the growth figures drop to 3.4% and 5.1% for the same years. This foreign element alone accounts for 2.2 to 2.4 percentage points of the projected growth, with the Bank of Israel acknowledging considerable uncertainty surrounding these numbers.
The distinction extends to exports, which are expected to grow by 14% in 2026 with foreign production included, compared to only 5% without it. The Bank of Israel emphasizes that the lower figure better represents domestic economic activity. While foreign production contributes to tax revenue and impacts the deficit and national debt, it does not rely on local capital or Israeli workers, with profits largely flowing to foreign shareholders and taxes often reduced.
This divergence is starkly illustrated in fiscal terms. The debt-to-GDP ratio is forecast to decrease from 68% at the end of 2026 to 66.5% by the end of 2027. However, when excluding foreign production, the ratio actually increases from 70% to 70.5%, indicating that the projected debt reduction is largely a result of inflated GDP figures. Israel is now facing a situation similar to extreme cases like Ireland, where multinational corporations' profits significantly distort GDP measurements.
Prime Minister Benjamin Netanyahu previously touted a 4.5% growth forecast from the IMF as evidence of a "booming Israeli economy." In response, the Governor of the Bank of Israel noted that while countries at war typically lose about 10% of their GDP, Israel's overall GDP is on that projected trendline. However, he clarified that without foreign production, Israel's GDP is still approximately 3.7% below that trend. The Governor attributed the economy's resilience, which has kept inflation below the target and risk premiums low despite ongoing conflicts, to the public and firms, rather than the government.
