90% of Israeli production abroad is driven by a single company

The national accounting data released yesterday was met with little surprise, as the Israeli economy has become accustomed to operating during wartime. However, a specific detail in the Central Bureau of Statistics (CBS) report warrants closer scrutiny: if one "deducts production abroad," the growth rate for the last six months is only 1%. This figure reflects a concerning erosion of the economic standard of living for Israeli citizens.

"Israeli production abroad" primarily refers to chips developed by Israeli teams at Nvidia (formerly Mellanox) but manufactured outside the country. According to Calcalist, over 90% of this output is linked to Nvidia, with the remainder coming from software, defense, and traditional firms seeking to mitigate the impact of a strong shekel.

The Scale of the Phenomenon

This macroeconomic trend is gaining significant momentum. In the first quarter of 2023, 5.3 billion NIS of Israel's GDP (1.3% of the total) was produced outside the country's borders. By the second quarter of 2026, this figure rose to 25.4 billion NIS, or 5.7% of the total GDP. Projections for 2026 suggest that offshore production could reach approximately 93 billion NIS.

The impact on growth figures is becoming increasingly pronounced. In 2023, the gap between total growth and growth "excluding production abroad" was just 0.1%. By 2026, that gap widened to 2.2%. This creates a mask of an "Israeli miracle," potentially obscuring the true state of the domestic economy.

Macroeconomic Implications

The government and the Bank of Israel must now reassess their analytical frameworks, focusing on three key areas:

1. Growth Potential: Economic models targeting 3.5% growth rely on local resources. With 100 billion NIS being produced abroad, growth targets should be adjusted to 5% or higher.

2. Interest Rates: Concerns at the central bank regarding inflationary pressure from lowering interest rates may be overstated. Since a significant portion of activity occurs outside Israel, its impact on domestic prices is limited.

3. Tax Revenues: While the state collects corporate tax on offshore chip production, it loses out on income tax from local workers, municipal taxes (arnona), and associated service revenues that would be generated by domestic operations.

Offshore production is a positive indicator of Israel's relative advantages. However, it requires the Ministry of Finance and the Bank of Israel to adapt policy to a new reality where a growing portion of Israel's GDP is produced beyond its borders.