Bank of Israel Distinguishes Local Growth From Overseas Production
Translated & summarized from Bizportal by baba
The Bank of Israel has begun distinguishing between official GDP growth and domestic economic activity, revealing a significant gap. While Israel's GDP is projected to grow by 5.6% in 2024, growth from local activity is only 3.4%, due to substantial production by Israeli companies occurring overseas. This new metric, which accounts for factors like Nvidia's operations, is considered more relevant for assessing the economy's health and guiding monetary policy. The distinction also impacts the national debt-to-GDP ratio and highlights ongoing economic challenges like labor shortages.
The story in 6 lines · by baba
- Bank of Israel now separates official GDP growth from domestic economic activity.
- Official 2024 GDP growth is 5.6%, but domestic activity growth is only 3.4%.
- Overseas production by Israeli companies significantly inflates reported GDP.
- Nvidia's operations are a prominent example of this economic phenomenon.
- The distinction impacts assessments of national debt and monetary policy.
- Labor shortages and conflict impact continue to affect local economic recovery.
The Bank of Israel has introduced a new method for assessing the Israeli economy, differentiating between economic activity occurring within Israel and production by Israeli-registered companies that takes place abroad. For 2024, the official GDP growth forecast is 5.6%, but after deducting overseas production, the growth rate for domestic activity falls to 3.4%. This distinction is crucial for understanding the true state of the Israeli economy, as a significant portion of the reported growth stems from sales of chips and technology products manufactured outside Israel, with profits often accruing to foreign shareholders.
The phenomenon is particularly linked to the global tech industry, exemplified by companies like Nvidia, which have substantial R&D operations in Israel. Nvidia's acquisition of Mellanox in 2020 integrated a significant Israeli operation into its high-speed data center networking business. The immense demand for AI computing boosts sales of these products, and a portion of this business activity is attributed to Israeli companies. While the development of advanced chips may occur in Israel, the physical manufacturing often happens in factories overseas, such as in Taiwan, and the products are shipped directly to customers abroad.
According to national accounting rules, if an Israeli company owns the products and is responsible for their sale, the added value from foreign contract manufacturing can be recorded in Israel's GDP. This differs from situations where the Israeli R&D center is merely paid for research and development services. The Bank of Israel highlights that while this overseas production contributes to GDP and tax revenues, its direct impact on local employment, consumption, and household income is considerably smaller.
The share of overseas production in Israel's GDP has grown significantly, from 1.7% in 2023 to an estimated 3.5% in 2025 and 5.8% in the second quarter of 2026. This trend creates a widening gap between GDP and Gross National Income (GNI), which reflects income belonging to the country's residents. Profits recorded as Israeli GDP but ultimately belonging to foreign shareholders reduce the GNI. This distinction also impacts the debt-to-GDP ratio, which appears to improve under the official figures but may actually worsen when adjusted for overseas production.
Governor Amir Yaron and the Research Department are now prioritizing the GDP figure excluding overseas production for economic assessments. This adjusted figure is seen as more relevant for monetary policy decisions, as it better reflects domestic demand, employment, and wage dynamics. While the official GDP growth is projected at 5.6% for 2024, the adjusted domestic growth of 3.4% suggests that the economy is still facing limitations, including labor shortages and the cumulative impact of the ongoing conflict, with local activity expected to remain below its pre-war trend by the end of 2027.
