Israel’s GDP is surging – its domestic economy tells a different story

Israel’s latest economic figures look remarkable. The economy grew by 3.6% in the second quarter of 2026, equivalent to an annualized rate of 15.4%. Inflation, meanwhile, has fallen to 1.5%, raising expectations that the Bank of Israel could cut interest rates again. Taken together, the numbers appear to tell a simple story: Israel has emerged from another period of war with an economy growing rapidly and inflation under control.

The reality, however, is more complicated. Israel’s economy is recovering, but part of its impressive growth is being driven by an unusual source – economic activity tied to multinational companies that takes place outside Israel. Nvidia, through its large Israeli operation, appears to be responsible for most of it.

This is an important point because the headline growth figure may give an exaggerated impression of the strength of Israel’s economy, particularly for households and local businesses.

First, the unusually strong second-quarter figure partly reflects the low base from which Israel was recovering. The war with Iran disrupted economic activity earlier in the year, as businesses closed, work was interrupted and spending and investment were postponed. Once those restrictions eased, much of that activity resumed, producing a sharp quarter-on-quarter rebound.

Israel has experienced similar swings during the past three years, with periods of fighting followed by strong recoveries as economic activity returned toward normal. The 15.4% annualized figure should therefore be read in that context. It reflects the speed of the rebound from a disrupted quarter, rather than an economy suddenly growing at anything close to 15% a year.

There are nevertheless encouraging signs beneath the headline. Consumer spending recovered, business activity increased and trade strengthened. The Bank of Israel has also expected economic growth to accelerate as some of the restrictions caused by the security situation ease.

But one part of the numbers deserves particular attention.

Israel’s official GDP can include some production that physically takes place in other countries. This sounds strange, but there is a relatively simple explanation.

Imagine that technology developed by a company’s Israeli operation is used to produce chips in Taiwan, which are then sold to customers in the United States. Depending on how the company and its intellectual property are structured, some of the value created by those chips can be recorded as Israeli economic output even though the factory is not in Israel and the finished product never passes through an Israeli port.

Put simply, this type of activity has become much larger.

According to figures reported from Israel’s latest national accounts, Israeli production abroad increased from NIS 5.3 billion in the first quarter of 2023 to roughly NIS 25.4 billion ($8.5 billion) in the second quarter of 2026. Its share of the economy increased from about 1.3% to 5.7% over that period.

Nvidia appears to be the main reason. The Israeli Central Bureau of Statistics (CBS) does not publish figures for individual companies, so it would be wrong to describe the entire amount as Nvidia. But reporting based on industry estimates indicates that the US chip giant accounts for most of this overseas production.

The connection comes largely through Mellanox, the Israeli chip and networking company Nvidia bought for about $7 billion in 2020. Nvidia has since expanded significantly in Israel, which has become one of the company’s most important research and development centers outside the United States.

This is unquestionably good for Israel. Nvidia employs thousands of highly skilled workers, invests heavily in research and development and generates economic activity and tax revenue. Its success also demonstrates Israel’s importance to the global semiconductor and artificial intelligence industries.

The problem is not Nvidia. The problem is what its extraordinary growth does to Israel’s economic statistics.

The CBS has begun showing what the economy would look like without production abroad by multinational companies. And the difference is pretty staggering.

Looking at the first half of 2026 in a way that reduces the distortion created by the sharp fall and rebound around the fighting, Israel’s GDP increased by 3.2%. However, when excluding production abroad, growth was only about 1%.

The difference was already visible last year. Israel’s economy grew by 3.5% in 2025, according to the figures cited in the supplied material. Without production abroad by multinational companies, growth would have been about 2.1%.

That is a much less spectacular economy.

A factory operating in Israel has a much greater direct impact on the domestic economy than a chip manufactured in Taiwan using technology developed by an Israeli operation. It employs workers in Israel, who spend part of their income locally, while the factory itself buys goods and services from Israeli suppliers and invests in local operations. This creates additional economic activity that spreads well beyond the company itself.

Production abroad, however, can still create enormous value for Israel, particularly when the intellectual property and research behind it originate here. But much less of the actual production activity takes place inside the country.

This helps explain why the official GDP figures can look extremely strong while conditions for many Israeli businesses and households feel considerably less impressive.

It also creates a headache for the Bank of Israel.

The central bank has been cutting interest rates as inflation has fallen. Its benchmark rate currently stands at 3.5%, while annual inflation has dropped to 1.5%, comfortably inside the Bank’s target range of 1%-3%.

Normally, a rapidly growing economy would give a central bank little reason to lower interest rates. A genuine economic boom would more likely support keeping rates elevated – or even raising them if stronger demand were pushing inflation higher. Rate cuts are generally more appropriate when economic growth is weak or slowing and inflationary pressures are under control.

But Israel is not really growing at anything resembling 15%.

If a meaningful part of the growth comes from Nvidia-related activity taking place abroad, it would put far less pressure on prices within Israel. A chip produced elsewhere does not increase demand for an apartment in Tel Aviv or Haifa. It does not compete for an Israeli construction worker or directly increase demand in Israeli shops.

The Bank of Israel has itself acknowledged this distinction. In its July interest-rate decision, it noted that a significant part of recent growth reflected production abroad by global companies operating in Israel and that growth was weaker when this activity was removed.

That means the Bank has to look beyond the headline GDP figure when deciding what to do with interest rates.

At the same time, the strong shekel has helped bring inflation down. A stronger currency makes imported goods cheaper in shekel terms, helping reduce prices for everything from raw materials to consumer products. But there is another side to this. Israeli exporters earning dollars while paying salaries and other expenses in shekels are being squeezed.

Against this backdrop, the Bank of Israel has good reason to look beyond the headline GDP figure. The strength of domestic demand, wages, inflation and the exchange rate provide a better indication of whether the economy can absorb further interest-rate cuts.

The Nvidia effect also raises a broader issue. Israel should want the company to become even larger. Having one of the world’s most important technology companies expanding its Israeli operations is an economic advantage, not a weakness. But as Nvidia accounts for a growing share of measured economic activity, policymakers and investors will need to pay closer attention to what the headline figures actually represent.

The bigger concern is what lies outside Nvidia. Growth excluding production abroad has been far more modest, suggesting that the recovery has yet to spread evenly through the domestic economy. That leaves the Bank of Israel with little reason to treat the latest GDP figure as evidence of overheating, particularly with inflation at 1.5%.

That does not make another rate cut automatic. Wage growth, housing costs and geopolitical uncertainty still argue for caution. But the latest figures have made the Bank’s task clearer rather than easier: inflation points toward further easing, while headline GDP points in the opposite direction. Strip out the extraordinary contribution from production abroad, however, and the apparent economic boom becomes much more modest. The 15.4% figure may be impressive, but it is not the economy the Bank of Israel is actually trying to manage.