Israel flag Israel: Economic and Political Overview

The economic context of Israel

Economic Indicators

For the latest updates on the key economic responses from governments to address the economic impact of the COVID-19 pandemic, please consult the IMF's policy tracking platform Policy Responses to COVID-19.

The Israeli economy has recorded one of the best performances of the OECD countries in recent years, mainly due to an increase in the working-age population and the participation rate. However, after reaching 3.4% of GDP in 2019, growth was abruptly halted and turned negative in 2020 (-2.2%) due to the outbreak of the Covid-19 pandemic. According to IMF estimates, GDP growth picked up to 7.1% in 2021, supported by relaxed restrictions measures and robust exports. Economic growth should remain vigorous in 2022 (4.1% of GDP) and 2023 (3.6%) (IMF), supported by a recovery in tourism, improved economic ties with Gulf neighbours and a booming technology industry (Focus Economics). In the long term, the increase in the proportion of low-skilled Har (ultra-Orthodox Haredim) and Israeli Arab communities and of the working population (expected to fall from 25% to 40% by 2045) are potential obstacles to growth.

In 2021, Israel’s economy rebounded strongly despite the forth wave of the COVID-19 pandemic. In response to the new surge in infections, the government tightened some restrictions on gatherings and launched a booster vaccination campaign in August. In the light of the recovery, policy support such as certain unemployment benefits and grants to hard-hit businesses were withdrawn (OECD). The economic crisis caused by the Covid-19 pandemic had a major impact on the country's fiscal situation. According to the IMF estimates, the budget deficit reached -9.8% GDP in 2020, and remained high in 2021 (-6.3% GDP). It is expected to decrease to -4% GDP in 2022 and -3.6% GDP in 2023. Similarly, public debt increased sharply since the pandemic, reaching 73.2% GDP in 2021, and is forecast to remain at this level in 2022 (73.2%) and 2023 (73.1%). After turning negative in 2020 (-0.6%), inflation increased in 2021 due to rising energy, food and housing expenditure prices (OECD). Estimated at 1.4% in 2021, it is expected to reach 1.8% in 2022 and 1.6% in 2023, within the central bank’s target range (IMF). In August 2021, the government adopted an ambitious reform programme aimed at boosting infrastructure investment, reforming the vocational system and improving business environment, in order to increase productivity to support a sustainable growth (OECD). Investing in pre-school education to improve skills and make growth more inclusive (OECD) and ensuring the social and economic integration of Arab and Haredim minorities (IMF) are some of the challenges faced by the country.

Israel has one of the highest living standards in the region. The average salary in Israel is similar to average salaries in Europe. However, 25% of Israelis live in poverty and inequality is relatively high, which explains the frequent social protests. Furthermore, households suffer from high real estate prices and costs of living. The unemployment rate has risen due to the global crisis caused by the Covid-19 pandemic and will reach 5.1% in 2021. According to IMF estimates, the unemployment rate will decrease to 4.6% in 2022 and 4.3% in 2023.

 
Main Indicators 20202021 (e)2022 (e)2023 (e)2024 (e)
GDP (billions USD) 413.27488.53527.18564.15591.33
GDP (Constant Prices, Annual % Change) -1.98.66.13.03.0
GDP per Capita (USD) 4452555860
General Government Balance (in % of GDP) -9.4-3.6-0.7-0.9-1.6
General Government Gross Debt (in % of GDP) 70.768.061.557.655.7
Inflation Rate (%) -0.61.54.53.62.5
Unemployment Rate (% of the Labour Force) 4.35.03.93.83.7
Current Account (billions USD) 21.8220.4713.1420.8821.21
Current Account (in % of GDP) 5.34.22.53.73.6

Source: IMF – World Economic Outlook Database, October 2021

Note: (e) Estimated Data

Main Sectors of Industry

Israel has a diversified and technologically advanced economy. The agricultural sector employs 1% of the active population while accounting for 1.2% of GDP (World Bank, 2020). The country's main crops are fruits and vegetables, cereals, wine, cattle farming. It has become a leading agri-tech country, “greening” the desert to grow most of the exported food. Israel is almost completely dependent on imports to meet its supply of food products. However, throughout the COVID-19 crisis, there were no reports indicating a lack of inputs (USDA Foreign Agricultural Service).

Israeli industry excels in the production of chemical products (Israel specialises in generic medicines), plastics and high-tech (aeronautics, electronics, telecommunications, software, biotechnologies, etc.). Industry as a whole comprises 18.6% of GDP and employs 17% of the workforce (World Bank, 2020). Numerous companies, particularly those that produce state-of-the-art technology, have benefited from their ability to secure funding from Wall Street and other international financial centres. Israel ranks second, after Canada, in terms of the number of companies registered on American stock markets. Many leading international hi-tech companies have established R&D centers in Israel. Companies such as Intel, Microsoft, Cisco, IBM and Apple chose Israel as the site for their first development centers outside of the United States. Other important sectors of activity include diamond cutting, textiles and tourism. Despite the COVID-19 pandemic, Israeli tech sector recorded a strong growth in 2021, raising record levels of investment for a second consecutive year (The Associated Press).

The majority of the workforce (82%) is employed in the tertiary sector, which accounts for 71.4% of GDP. Tourism remains significant despite the Israeli-Palestinian conflict, with a record of 4.55 million tourist arrivals in 2019 (+10.6 year-on-year), generating approximately USD 6.3 billion in revenues. The tourism industry was one of the industries most affected by the COVID-19 crisis. Less than 830,000 tourists entered Israel during 2020, a decline of 81.7% from the previous year. Between January and September 2021, only 243,600 tourists visited the country (Central Bureau of Statistics).

 
Breakdown of Economic Activity By Sector Agriculture Industry Services
Employment By Sector (in % of Total Employment) 0.9 17.2 81.9
Value Added (in % of GDP) 1.1 18.5 71.2
Value Added (Annual % Change) 1.9 2.8 3.4

Source: World Bank, Latest Available Data. Because of rounding, the sum of the percentages may be smaller/greater than 100%.

 

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Indicator of Economic Freedom

Definition:

The Economic freedom index measure ten components of economic freedom, grouped into four broad categories or pillars of economic freedom: Rule of Law (property rights, freedom from corruption); Limited Government (fiscal freedom, government spending); Regulatory Efficiency (business freedom, labour freedom, monetary freedom); and Open Markets (trade freedom, investment freedom, financial freedom). Each of the freedoms within these four broad categories is individually scored on a scale of 0 to 100. A country’s overall economic freedom score is a simple average of its scores on the 10 individual freedoms.}}

Score:
73,8/100
World Rank:
26
Regional Rank:
2

Economic freedom in the world (interactive map)
Source: Index of Economic Freedom, Heritage Foundation

 

Business environment ranking

Definition:

The business rankings model measures the quality or attractiveness of the business environment in the 82 countries covered by The Economist Intelligence Unit’s Country Forecast reports. It examines ten separate criteria or categories, covering the political environment, the macroeconomic environment, market opportunities, policy towards free enterprise and competition, policy towards foreign investment, foreign trade and exchange controls, taxes, financing, the labour market and infrastructure.

Score:
7.71/10
World Rank:
16/82

Source: The Economist Intelligence Unit - Business Environment Rankings 2020-2024

 

Country Risk

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Sources of General Economic Information

Ministries
List of ministries
Ministry of Agriculture and Rural Development
Ministry of Foreign Affairs
Ministry of Economy and Industry
Ministry of Communications
Ministry of Construction and Housing
Ministry of Finance
Ministry of Tourism
Ministry of Health
Statistical Office
Central Bureau of Statistics
Central Bank
Bank of Israel
Stock Exchange
Tel-Aviv Stock Exchange
Economic Portals
Israeli Business Portal
 

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Latest Update: November 2022