Analysis
With Nvidia, Israel’s economy is booming. Without it, the picture is more complicated
The Bank of Israel has split its growth forecast for the first time, highlighting the outsized contribution of production abroad. The distinction raises questions about how much headline growth says about the economic conditions facing Israelis at home.
This week, the Bank of Israel did something unprecedented when it presented its macroeconomic forecast. For the first time, it split its growth projections into two measures: growth including production by Israeli companies abroad, and growth excluding it. In simple terms, with Nvidia and without Nvidia.
This is not merely a technical adjustment. It is an explicit acknowledgment by the central bank that two very different economic realities are unfolding in Israel, and that only one of them fully reflects what is happening to workers, consumers and the domestic labor market.
Production abroad, which includes goods developed in Israel, manufactured by overseas subcontractors and sold abroad without ever crossing the Israeli border, has surged from 1.7% of GDP in 2023 to 3.5% in 2025 and 5.8% in the second quarter of 2026. The result is a striking headline forecast: growth of 5.6% in 2026 and 7.5% in 2027. By almost any standard, these are impressive figures, well above the averages in the International Monetary Fund's forecasts released a week ago.
But exclude production abroad, and the picture changes. Growth is projected at 3.4% this year and 5.1% in 2027. This component alone contributes 2.2 and 2.4 percentage points to the respective annual growth rates. The Bank of Israel acknowledges that uncertainty surrounding this activity amounts to at least one percentage point in either direction. After all, while economists debate the implications of the AI boom, nobody knows exactly where it will lead.
The discrepancy runs through the forecast. Exports are projected to grow by 14% in 2026, but by just 5% when production abroad is excluded. Crucially, Governor Amir Yaron and his team describe the lower figure as one that “better represents economic activity.”
This does not mean production abroad is irrelevant. It generates tax revenue for the state and therefore matters for the budget deficit and national debt. But it does not necessarily generate the same domestic economic benefits as production in Israel. It does not depend to the same extent on local capital or Israeli workers, much of the profit may flow to foreign shareholders, and the effective tax burden can be relatively low.
The distinction is visible in the Bank of Israel's projections. GDP continues to rise, as does gross national income, which measures income accruing to Israeli residents. Yet the measure of output excluding production abroad lags behind. The headline numbers are strong, but they do not tell the whole story about the economy at home.
The fiscal implications are even more striking. Israel's debt-to-GDP ratio is projected to fall from 68% at the end of 2026 to 66.5% at the end of 2027. Exclude production abroad, however, and the ratio rises from 70% to 70.5%. In other words, the anticipated improvement in the headline ratio depends heavily on the contribution of production abroad to GDP.
Ireland offers a cautionary example. Because multinational corporations book substantial profits there, the country has adopted a modified measure of national income, known as modified gross national income, or GNI*, that is significantly lower than GDP. The aim is to provide a more meaningful picture of the resources available to the domestic economy. Israel is beginning to confront a similar statistical challenge, even if the scale and underlying circumstances differ.
And this is where politics enters the picture.
On October 15, Prime Minister Benjamin Netanyahu publicized the IMF's forecast of 4.5% growth under the headline: “The Israeli economy is flourishing!” Asked at the press conference about the credibility of that claim, Yaron avoided a direct political confrontation but offered some context. Research suggests that countries at war can suffer GDP losses of around 10%, he said, while Israel's total GDP has already returned to its prewar trend line. He immediately added an important qualification: excluding production abroad, the economy remains about 3.7% below that trend.
So, is there an economic miracle? After three years of war, with no “absolute victory” and active fronts still in play, Israel is growing. Inflation stands at 1.5%, below the midpoint of the target range, while the country's risk premium is approaching its pre-October 7 level. Many countries would envy that resilience, as Yaron noted after returning from an IMF gathering in Bangkok.
A gap of 3.7% below the prewar trend, compared with the much larger losses often associated with war, is evidence of genuine economic resilience. But it is not the same as saying that the economy is growing by 5.6% in a way that fully reflects domestic activity.
The most significant, and perhaps most courageous, statement Yaron made in the week before the elections came next. Credit for the economy's resilience, he said, “belongs to the public and to the firms.”
Every economy rests on three broad groups: households, which supply labor and consume goods and services; businesses, which employ people and produce them; and the government, which sets policy and provides public services. Yaron singled out the first two. That was not a coincidence. The government, by contrast, received a list of responsibilities and a pointed reprimand.
His first recommendation was to rebuild fiscal safety buffers immediately. These were the reserves and room for maneuver that, according to this argument, helped the economy absorb the shock of October 7. He also defended the principle behind recent across-the-board budget cuts, saying it was appropriate to trim spending that does not contribute to growth. The implication was clear: this should include coalition-related funds.
These were not simply technical comments on the government's latest budget adjustments. They amounted to a broader assessment of its economic record over four years. The criticism is that the government has weakened the engines of future growth while failing to rein in spending that does little to improve productivity or participation in the workforce.
It is a government that celebrates headline growth even when a growing share of that growth comes from production abroad, and when much of the economy's resilience is being driven by citizens and business owners navigating extraordinary circumstances.
The Israeli economy is not simply flourishing. It is proving more resilient than many expected, but that resilience has limits. And, in Yaron's telling, much of the credit belongs to the people and businesses doing the work, not to the politicians seeking another term.
