Gazdasági elemzések
Israel

Israel

Population 8.9 million
GDP 41,728 US$
A3
Country risk assessment
A2
Business Climate
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Synthesis

major macro economic indicators

  2017 2018 2019 (e) 2020 (f)
GDP growth (%) 3.6 3.4 3.1 -5.5
Inflation (yearly average, %) 0.2 0.8 1.0 1.3
Budget balance (% GDP) -1.0 -3.3 -3.7 -3.8
Current account balance (% GDP) 2.7 2.7 2.4 2.5
Public debt (% GDP) 60.4 60.8 61.9 62.8

(e): Estimate. (f): Forecast.

STRENGTHS

  • Steady and significant growth
  • Very competitive economy, high value added production, strong R&D and venture capital
  • Low inflation and interest rates
  • Encouraging business environment
  • Highly educated work force
  • Perspective of energy independence with the Leviathan gas-field

WEAKNESSES

  • High exposure to the impact of global trade war
  • Rising public debt stock, wider budget deficit, high defense expenses
  • Political ambiguity after the elections
  • Security problems due to rising regional instability
  • Limited fiscal resources (25% of GDP), weak public investment, lack of transport infrastructures
  • Lack of inclusion of Israeli-Arab and Haredim (ultra-orthodox) in the economy, organized crime still influential in the South

Risk assessment

Growth close to its potential in a full employment environment

The Israeli economy is very competitive and technology-oriented resulting in a high level of high value-added production. The economy is expected to show a stable growth around its potential, driven by private consumption (nearly 55% of GDP). An accommodative monetary policy, with low levels of interest rates on loans (policy rate standing at 0.25%), along with full employment, support private consumption. The unemployment rate is expected to stand close to a historical low of 4% in 2020. Inflation is forecasted to remain within the official target bracket of 1-3%, despite the volatility due to the impact of certain factors such as fruit and vegetable prices, energy prices and the value of the shekel. Investments will contribute moderately to growth due to the completion of some large investment projects. Additionally, construction investments may have a positive contribution, thanks to the government’s efforts to reduce the housing shortage by unlocking land for new constructions. Export growth, led by medium-high technology products (around 40% of total manufacture exports) and services, are expected to weaken mainly on the back of lower growth perspectives in key export markets such as Europe and the US. Coupled with continuous growth in domestic consumption which fuels import demand, the negative contribution of external trade in goods to growth is expected to continue. This shows that the risks related to uncertainties in the global economy (US-China trade war, Brexit etc.) may have a more severe impact on Israeli growth in the upcoming quarters. Manufacturing production remained in the positive territory in 2019 on average and this trend is expected to continue in 2020. Wage growth supports retail sales despite a recent slowdown. Confidence remains positive. The government’s efforts to improve transport, utilities and energy infrastructure is also expected to support the construction sector.

 

Widening budget deficit, but strong external position

Budget deficit is on the rise, hovering close to 4% of GDP. The increase is lifting the public debt above 60% of GDP. Nevertheless, the external share of the debt has been decreasing since a few years, to stand at 13% from around 25% and gross yield on ten year bonds was 1% at October 2019. Conversely, USD- and EUR-denominated debts represent respectively 67 and 31% of the total debt. Although economic growth should support tax revenues, new elections would delay the implementation of measures necessary to make the fiscal policy less accommodative.

Services export (nearly half of total exports) will drive the current account surplus, but the fall in goods exports will be a drag on trade deficit. Services exports are expected to be driven by the ICT sector, which accounted for 36% of total services exports in Q1 2019, although the slowdown in Europe, which absorbs around one third of Israeli exports, will represent a challenge for exporters. Moreover, any rise in trade tensions would affect negatively Israel’s goods exports, with the ensuing slowdown in demand from China as well as the US. The current account surplus is also fed by transfers from the Diaspora and the US government, while revenues from investments abroad are balanced by remittances from foreign nationals working in Israel. Tourism revenues, which hit nearly USD 4 billion in the first eight months of 2019, are also expected to support the current account surplus. The ratio of direct investment flow to GDP hovered around 5% since 2017. FDIs and the current account surpluses since more than a decade enabled the central bank to accumulate foreign currency reserves that stood at USD 121 billion as of October 2019 (nearly threefold of short-term external debt). At that time, the international investment position of Israel, net creditor to the rest of the world, stood at USD 146.4 billion. Gross external debt of the country, standing at 25% of GDP, is not presenting a challenge.

 

Political uncertainty continues after the elections

Israel again held parliamentary elections in September 2019, after early elections in April had produced no winner. Yet September’s poll saw Likud win 32 seats and Blue and White 33 within the 120-seat Parliament. Both parties have failed to secure the sixty-one seats needed for a majority mostly because of a very fragmented Parliament and a low-level electoral threshold of 3.25%. A fragmented political scene represents a risk to political stability. Political uncertainty may push investors to pause their investment projects until the formation of a new government not secured by new elections in March 2020. On the external side, continuous conflicts with Palestine represent persistent risks of heightened violence. The polarisation of the society and the shift of the political system to the right make a peace settlement with the Palestinians highly unlikely. The peace process is facing challenges from the Palestinian side as well. Tensions with Iran will also continue to pose risks.

 

Last update: May 2020

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