Economic Analysis
Israel

Israel

Population 8.3 million
GDP per capita 35743 US$
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Country risk assessment
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Business Climate
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Synthesis

major macro economic indicators

   2014 2015 2016 (f) 2017 (f)
GDP growth (%) 3.2 2.5 4.0 3.5
Inflation (yearly average) (%) 0.5 -0.1 -0.1 0.8
Budget balance (% GDP)  -3.4 -3.1 -3.4 -3.9
Current account balance (% GDP) 4.0 4.6 3.1 2.9
Public debt (% GDP) 66.0 64.0 65.8 67.6

 

(e): estimate (f): forecast

STRENGTHS

  • Industry dominated by high-technology products.
  • Highly skilled workforce.
  • Political and financial support from the United States and the diaspora.
  • Natural gas production, since mid 2013, from large offshore reserves.

WEAKNESSES

  • Political fragmentation and fragile coalition government.
  • Stalled peace process between Israel and the Palestinian Territories.
  • Relatively high level of public debt

Risk assessment

A strong economic growth benefiting from the private consumption dynamics

The sharp increase in activity seen in 2016 is not likely to be repeated in 2017, given the weight of one-off factors in the 2016 growth. However, economic activity  continues tobe mainly driven by the buoyant dynamic of private consumption, representing around 60% of GDP: household demand is likely to rise thanks to the decline in unemployment, the increase in the participation rate and the raise of the minimum wage, which are expected to continue until the end of 2017. The contribution from exports will remain moderate in 2017 given the sluggish growth outlooks for the United States and the Eurozone, weak global demand for diamonds, as well as the appreciation of the shekel which reduces the competitiveness of Israeli exports, despite the low price-elasticity of high technology products (50% of manufactured exports). Investment, accounting for 19% of Israel’s GDP, will keep recovering after a long period of underinvestment, particularly in capital goods, in a context of very low interest rates.

The deflation recorded in 2016 was a result of external factors and in particular the fall in oil prices. The persistence of a sharp growth in 2017 and the expected gradual rise in oil prices will lead to a slow rise in the general level of prices.

 

Continuing public account deficit

The budget deficit is likely to widen in 2017, mainly because of increased public spending in areas such as housing, healthcare and transport. The coalition government plans on addressing the issue of inequality with an increase in social spending. Security expenditures will remain high in 2017. Tax revenues could fall slightly as a result of the tax cuts planned by the government. It plans on implementing small reductions in income taxes in order to encourage consumption and will cut corporate tax by two percentage points (24% in 2017, 23% in 2018) to promote new investment, especially in the high technology sector. The additional tax revenues arising from the increase in economic activity should partially offset these tax cuts. Despite a relatively high level of debt, the sovereign risk remains limited for Israel which should be able to continue borrowing at low rates on the domestic and international markets.

The current account surplus is expected to reduce further in 2017 from its peak in 2015. As in 2016, the rise in oil prices is going to increase the import bill in 2017. On top of this, the positive outlooks for consumption and investment in 2017 will also lead to increased imports. Any increase in exports will not be large enough to prevent a deterioration in the balance of trade in goods. However, the balance of trade in services and net transfers will continue to keep the current account balance in the black.

 

A stronger but still divided coalition

The early parliamentary elections won by Likud in March 2015 led to the formation of a new government on the right which re-elected Benyamin Netanyahou Prime Minister. The coalition, based on an agreement between Likud, the Jewish Home, the centre-right Kulanu and the United Torah Judaism (Ashkenazi) and Shas (Sephardic) parties, was strengthen in May 2016 by an agreement signed with Yisrael Beiteinou. From its initial majority of one seat in the Knesset, the coalition increased its majority by five seats. In addition to a shift to the right, the agreement also represents a renewal of divisions within the majority, namely between the religious and the secular elements.

The new regulatory context for the gas sector approved, by a relative consensus, in May 2016 has allowed the removal of the internal obstacles to the development of the Leviathan gas field off the Israeli coast. Production is expected to start in 2019–2020. As with the first gas export contract signed with Jordan in September 2016, these gas resources could enable the development of new strategic links within the region, in particular with Turkey.

Furthermore, the election of Donald Trump is expected to lead to an improvement in US-Israeli relations which have deteriorated significantly, most particularly following the signing of the agreement on the Iranian nuclear program. The Trump Administration, which will be less involved in Israeli-Palestinian affairs than its predecessor, is not expected to relaunch the peace process that has been at a standstill for several years and which now seems likely to be frozen until at least the next Israeli parliamentary elections in 2019. In this context, the danger of a further escalation in the level of violence the country has been experiencing since October 2015 cannot be ruled out.

The civil war in Syria is creating serious security risks for Israel, with the danger of externalities targeting the country, in the form of terrorist attacks.

 

Last update: March 2017

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