Over 90% of Israeli Production Abroad Linked to One Company, Impacting Economic Growth Figures
Recent national accounting data revealed that more than 90% of Israeli production conducted abroad is connected to Nvidia (formerly Mellanox), with a significant portion also tied to Israeli software companies. This phenomenon, largely unnoticed by the public, has substantial macroeconomic implications. While Israeli economic growth appeared to recover in the second quarter, excluding foreign production shows a worrying growth rate of just 1%, indicating a potential erosion in Israelis' economic living standards.
The Central Bureau of Statistics (CBS) highlighted that Israeli production abroad, primarily semiconductor manufacturing developed by Israelis but physically produced overseas, has surged dramatically. In the first quarter of 2023, foreign production accounted for 1.3% of Israel's GDP, rising to 5.7% by the second quarter of 2026. Projections suggest that by the end of 2026, production abroad could reach approximately 93 billion shekels annually.
This shift affects key economic indicators such as growth rates, interest rates, and tax revenues. Without counting foreign production, Israel's growth rate has increasingly lagged behind overall figures, dropping from a 0.1% difference in 2023 to a 2.2% gap in 2026. Economists warn that Israel’s true growth potential, estimated at 3.5% annually based on domestic resources, could be adjusted upwards to over 5% when including foreign production. However, this also means that the apparent economic resilience may mask underlying domestic weaknesses.
Furthermore, the distinction between domestic and foreign production impacts monetary policy. The Bank of Israel might reconsider interest rate hikes since growth driven by overseas production has less inflationary pressure on the local economy. Additionally, while foreign production contributes to corporate tax revenues, it does not generate income tax, property tax, or local service taxes within Israel, potentially affecting government revenue forecasts.
The CBS’s decision to separately report growth figures with and without foreign production underscores the need for policymakers to reassess Israel’s economic strategies. The Ministry of Finance and the Bank of Israel are urged to analyze these trends carefully to adapt fiscal and monetary policies to this evolving economic landscape.
