Israel's Economy Surges 15.4% in Q2 but Relies Heavily on Nvidia

Israel's economy experienced a surprising 15.4% annualized growth in the second quarter of 2025, significantly exceeding expectations of around 10%, according to data from the Central Bureau of Statistics and Bank of Israel. This rebound followed a 2.2% contraction in the first quarter caused by the "Roaring Lion" military operation. The recovery was broad-based, with exports (excluding startups and diamonds) rising 25.2%, imports increasing 22.7%, government spending up 19.5%, business GDP growing 16.6%, and private consumption climbing 14.7%. However, these figures are partly influenced by a rebound effect after the conflict and a stronger shekel.

Despite the positive headline numbers, economists warn about Israel's heavy economic dependence on a single multinational company, Nvidia, particularly its Mellanox division. Exports attributed to companies with headquarters in Israel but producing abroad surged dramatically, with Nvidia's contribution pushing export values from $2 billion per quarter to $8 billion in Q1 2025. Without Nvidia and similar firms, Israel's GDP growth would have been 14.4% instead of 15.4% in Q2, and the economy would have contracted 5.8% in Q1 rather than 2.2%. For the full year 2025, official GDP growth was 3.5%, but excluding Nvidia, it would have been only 2.1%.

Leading economists, including Jonathan Katz of Leader Capital Markets and Ronen Menachem of Mizrahi Tefahot, emphasize that excluding the impact of global tech firms provides a clearer picture of Israel's real economic resilience. Katz noted that the actual domestic economy grew by only about 6.6% over two years compared to the official 10%, reflecting weaker real activity. Menachem pointed out that local value-added growth was just 1% annualized in the first half of 2025 when excluding foreign production.

The Bank of Israel's Monetary Committee acknowledged this issue in its latest interest rate decision, recognizing that much of the recent growth reflects foreign production by global companies based in Israel. The committee expects growth to broaden as supply constraints ease and more sectors contribute to the economy. This debate raises questions about which GDP measure should guide monetary policy and debt-to-GDP calculations, given the distortion caused by multinational firms' offshore production.

Overall, while Israel's economy shows strong headline growth post-conflict, the underlying domestic activity is more modest, with significant risks tied to reliance on a single global tech giant.