Nvidia's Influence Masks Israel's Deepening Economic Woes

The growing contribution of Nvidia to the Israeli economy is obscuring significant structural problems and presenting a misleadingly positive economic picture, potentially leading the government to postpone crucial reforms. According to an article in TheMarker, writer Sami Peretz argues that Nvidia's impact on growth indicators and the debt-to-GDP ratio has become so substantial that it allows the Israeli government to delay addressing economic imbalances. This influence has escalated over the past three years due to soaring chip sales and the AI revolution, which has made Nvidia a global giant. Its calculated contribution to Israel's GDP has jumped from billions to tens of billions of shekels annually, with projections reaching approximately 100 billion shekels by 2027.

A significant portion of this increase is linked to production activities outside Israel, which are counted towards Israeli GDP because Nvidia owns Mellanox, acquired in 2019. A senior public sector economist noted that while this activity boosts GDP, its actual economic value for Israelis is limited, as most foreign earnings are not tied to domestic production factors. He warned against basing economic policy on these figures without accounting for this distinction.

Nvidia's effect is particularly evident in the debt-to-GDP ratio. Projections from the Bank of Israel indicate the ratio will reach 70% this year without Nvidia's contribution, compared to 68% with it. The gap is expected to widen next year, with the ratio at 70.5% without Nvidia versus 66.5% with its inclusion. This creates an impression of financial improvement that does not reflect a real decrease in debt but rather an inflation of the calculated GDP.

Israel entered the COVID-19 crisis in 2020 with a debt-to-GDP ratio of 60%, which rose to about 70% during the pandemic before falling back to 60% by the start of the October 2023 war. This allowed for a significant increase in public debt, approximately 400 billion shekels, to fund the war. Peretz cautioned that relying on Nvidia-inflated figures could reduce pressure on the next government to implement measures for debt reduction and rebuilding financial reserves for future crises.

The writer believes that inflated figures related to Nvidia might prompt the next government to postpone necessary economic reforms. Israel needs to shift spending priorities, invest in growth engines, boost productivity, and reduce public debt. Challenges include increasing investment in Arab and Haredi education systems, integrating Haredi men and Arab women into the workforce, and expanding vocational training programs to enhance long-term economic performance.

The article also touches upon the implications of the crisis surrounding Nvidia and the resignation of its CEO, Jensen Huang, who supported the company's expansion in Israel and planned a major complex in the Jezreel Valley. The full impact of these developments on Nvidia's operations remains unclear. Peretz concluded that Nvidia's continued activity and growth are not guaranteed, and any slowdown in the AI sector or decline in the company's production could negatively affect Israeli economic indicators. He stressed that Israel, after years of war, increased public debt, and doubled security budgets, cannot afford to base its economic policies on inflated figures derived from production occurring outside its borders. He warned that these indicators could provide a false sense of stability while structural economic problems persist.