Economic Studies
Israel

Israel

Population 8.2 million
GDP per capita 37,222 US$
A3
Country risk assessment
A2
Business Climate
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Synthesis

major macro economic indicators

  2013  2014 2015 (f) 2016 (f)
GDP growth (%) 3.3 2.6 2.6 2.8
Inflation (yearly average) (%) 1.5 0.5 -0.1 2.0
Budget balance (% GDP) -4.1  -3.6 -3.7 -3.8
Current account balance (% GDP) 2.8 4.3 3.7 3.6
Public debt (% GDP) 67.2 67.1 67.2 67.2

 

(e): estimate (f): forecast

STRENGTHS

  • Industry dominated by high-tech products
  • Highly skilled workforce
  • Political and financial support from the US and the diaspora
  • Natural gas production since mid-2013 from large offshore reserves

WEAKNESSES

  • Political fragmentation and weak coalition governments
  • Stalemate in Israeli-Palestinian Negotiations Persists
  • Relatively high public debt

Risk assessment

Recovery expected in 2016

The two successive year of weak growth in 2014 and 2015 are expected to give way to recovery in 2016. Investment, mainly in capital goods, will show signs of rebound. The contribution of exports, which was negative in 2015, should cross into positive territory helped by moderate growth in the euro zone and by the positive US economic performances. Household demand, buoyed by an increase in jobs as by the raising of the minimum wage in April 2015, could, however, be constrained by the interest rate hike projected for 2016. Manufacturing industries, penalised by the fall in world trade are expected to benefit from increased demand for Israeli products. The construction sector is expected to stand out through a resurgence of activity. The deflation observed in 2015 is explained by external factors, so the recovery of activity in 2016 will lead to a gradual increase in the overall level of prices.  

 

Maintenance of the external position

2015 was marked by the holding of parliamentary elections in March, which resulted in the postponement of the 2015 budget vote to November either at the same time as the 2016 budget was voted. Indeed, the 2016 fiscal budget is expected to be close to the one voted in 2015.  Public spending will rise slightly.  Education, debt servicing and defence expenses should be maintained. The authorities are counting on a public deficit of 2.9% but the negotiations between the different members of the coalition over increasing certain items of budgetary expenditure suggest that this objective is not achievable. Tax receipts could, however, benefit from the economic recovery with a rise in receipts from statutory contributions. Despite the size of these budget deficits, the public debt will remain relatively stable in 2016.

The current account balance will remain in surplus in 2016 despite an increase in imports fuelled by the dynamism of domestic demand. Exports are expected to grow only slightly. The balance of services and that of revenues will continue to show a large surplus. Foreign direct investments are expected to slow, reflecting a loss of investor confidence in a context of regional instability. 

 

Stability of the banking system

Very concentrated and focused on the domestic market, the banking system is strong. It remains well capitalised and the burden of non-performing loans is limited. Moreover, it is showing strong resilience to the economic ups and downs. However, this ability to resist to shocks is achieved to the detriment of the banks’ profitability, which remains weak. Credit to the private sector has slowed in contrast to household debt, which increased by 3% in 2015. Compared with the other advanced countries, Israeli household and business debt remains low.

 

A weak government coalition in a context of renewed security tensions

The early parliamentary elections won by Likud resulted in the formation of a new right-wing national unity government reinstating Benjamin Netanyahu as prime minister.  The coalition, which is based on an agreement between Likud and the Jewish Home, the centre-right party Kulanu and the ultra-orthodox United Torah Judaism parties (Ashkenazy) and Shas (Sephardi) seems weak, heightening the risk of dissolution of the government. Following renewed tensions over the sharing of the Esplanade of the Mosques, the wave of knife attacks in which Israeli civilians are routinely targeted is increasing the climate of insecurity in the country. Moreover, although at the end of 2015 there has been a certain thaw in relations between Barack Obama's administration and the Netanyahu government, the Israeli government's stand on the signing of the agreement with Iran and continued Israeli settlement in Palestinian territory means Israel tends to be isolated from the international community.

 

Last update: January 2016

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