Israel: Economic and Political Overview
In this page: Economic Outline | Political Outline | COVID-19 Country Response
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. After an abrupt halt due to the COVID-19 pandemic, the Israeli economy resumed its growth path in 2021 (+8.6%) and 2022 (+6.1% - IMF) thanks to buoyant private consumption (around 50% of GDP) and investment, with the resilient high-tech sector attracting venture capital. Moreover, the effects of the Russian aggression on Ukraine had a milder impact on Israel as the country is self-sufficient in natural gas, although the conflict is expected to weaken external demand in the short term. Therefore, the IMF projects growth to moderate to 3% this year and the next, as sustained inflation bites on household spending and higher interest rates drag investment.
In 2022, government fiscal spending was reduced as COVID-related measures were phased out and subsidies in agriculture eased. The strong economic performance led to an increase on the revenue side, contributing to the narrowing of the government budget, estimated at 0.6% of GDP (from 3.6% one year earlier). Nevertheless, measures taken to mitigate the increase in the cost of living will weigh on future budgets, with deficits projected at 0.9% of GDP this year and 1.6% in 2024 (IMF). The public debt-to-GDP ratio resumed a downward path, standing at 61.5% in 2022 (from 68% one year earlier, marking the sharpest decline in 35 years) with projections for a further decrease in 2023 (57.6%) and 2024 (55.7%). Consumer price inflation, at 4.5%, was lower than in most OECD countries, but still above the 1-3% target range set by the Central Bank, which raised the policy rate five times in 2022, from 0.1% to 2.75%. As the global situation normalizes, the IMF sees the inflation rate decelerating over the forecast horizon (at 3.6% this year and 2.5% in 2024), although the robust domestic demand calls for a continuation of the gradual tightening of monetary policy so as not to add to inflationary pressures. International institutions welcomed the country’s ambitious reform programme aimed at boosting infrastructure investment, reforming the vocational system and improving the business environment, as well as the measures taken to reduce tariff and non-tariff import barriers that could have a double positive impact in reducing the cost of living and spurring competition and productivity.
Israel has one of the highest living standards in the region, with salaries in line with the European average (the GDP per capita PPP was estimated at USD 52,173 in 2022 by the IMF). However, 25% of Israelis live in poverty and inequality is relatively high. Furthermore, households suffer from high real estate prices and costs of living. The Israeli labour market is tight, with a low unemployment rate (3.9% in 2022) and employment above pre-crisis levels, so that the vacancy rate has stabilised at a historically high level towards the end of the year. According to IMF estimates, the unemployment rate will decrease further to 3.8% in 2023 and 3.7% in 2024.
| Main Indicators | 2020 | 2021 | 2022 (E) | 2023 (E) | 2024 (E) |
|---|---|---|---|---|---|
| GDP (billions USD) | 413.27 | 488.53 | 522.53 | 539.22 | 563.27 |
| GDP (Constant Prices, Annual % Change) | -1.9 | 8.6 | 6.4 | 2.9 | 3.1 |
| GDP per Capita (USD) | 44,850 | 52,152 | 54,710 | 55,536 | 57,064 |
| General Government Balance (in % of GDP) | -9.5 | -3.5 | -0.7 | -1.8 | -1.7 |
| General Government Gross Debt (in % of GDP) | 70.7 | 68.0 | 60.9 | 57.6 | 55.3 |
| Inflation Rate (%) | -0.6 | 1.5 | 4.4 | 4.3 | 3.1 |
| Unemployment Rate (% of the Labour Force) | 4.3 | 5.0 | 3.8 | 3.8 | 3.7 |
| Current Account (billions USD) | 22.57 | 21.01 | 19.09 | 18.87 | 18.68 |
| Current Account (in % of GDP) | 5.5 | 4.3 | 3.7 | 3.5 | 3.3 |
Source: IMF – World Economic Outlook Database, Latest data available.
Note : (E) Estimated data
Israel has a diversified and technologically advanced economy. The agricultural sector employs 1% of the active population, accounting for 1.3% of GDP (World Bank, latest data available). The country has an agricultural land of 638,400 ha (FAO) and its main crops are fruits and vegetables, cereals, wine, and cattle farming. Israel is almost completely dependent on imports to meet its supply of food products: its limited land and water resources preclude agricultural self-sufficiency and affect local production costs and consumer prices; nevertheless, the increasing technological progress and innovation, a high level of investment in R&D, and the potential expansion of water resources are among the primary drivers behind the agricultural sector’s growth. Israel has become a leading agri-tech country, “greening” the desert to grow most of the exported food. In 2021, agricultural exports reached USD 1.1 billion (CBS – latest data available).
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 17.2% of GDP and employs 17% of the workforce (World Bank). 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). Furthermore, 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. Overall, the manufacturing sector is estimated to account for 10% of GDP.
The majority of the workforce (82%) is employed in the tertiary sector, which accounts for 72.4% of GDP. Tourism remains significant despite the Israeli-Palestinian conflict: in 2022, 2.675 million tourist entries were recorded (as opposed to only 397,000 in 2021 and 831,000 in 2020, but still 41% below the pre-covid level). Revenue from incoming tourism stands at about ILS 13.5 compared to about ILS 23 billion in 2019. The Israeli economy is also at the forefront of hi-technology services industries. Although highly exposed to the real estate sector, the Israeli banking system is considered stable.
| 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) | 1.3 | 17.2 | 72.4 |
| Value Added (Annual % Change) | 6.7 | 6.0 | 9.2 |
Source: World Bank, Latest data available.
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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.
Economic freedom in the world (interactive map)
Source: Index of Economic Freedom, Heritage Foundation
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.
Source: The Economist Intelligence Unit - Business Environment Rankings 2020-2024
See the country risk analysis provided by Coface.
The world rankings, published annually, measures violations of press freedom worldwide. It reflects the degree of freedom enjoyed by journalists, the media and digital citizens of each country and the means used by states to respect and uphold this freedom. Finally, a note and a position are assigned to each country. To compile this index, Reporters Without Borders (RWB) prepared a questionnaire incorporating the main criteria (44 in total) to assess the situation of press freedom in a given country. This questionnaire was sent to partner organisations,150 RWB correspondents, journalists, researchers, jurists and human rights activists. It includes every kind of direct attacks against journalists and digital citizens (murders, imprisonment, assault, threats, etc.) or against the media (censorship, confiscation, searches and harassment etc.).
The Indicator of Political Freedom provides an annual evaluation of the state of freedom in a country as experienced by individuals. The survey measures freedom according to two broad categories: political rights and civil liberties. The ratings process is based on a checklist of 10 political rights questions (on Electoral Process, Political Pluralism and Participation, Functioning of Government) and 15 civil liberties questions (on Freedom of Expression, Belief, Associational and Organizational Rights, Rule of Law, Personal Autonomy and Individual Rights). Scores are awarded to each of these questions on a scale of 0 to 4, where a score of 0 represents the smallest degree and 4 the greatest degree of rights or liberties present. The total score awarded to the political rights and civil liberties checklist determines the political rights and civil liberties rating. Each rating of 1 through 7, with 1 representing the highest and 7 the lowest level of freedom, corresponds to a range of total scores.
Political freedom in the world (interactive map)
Source: Freedom in the World Report, Freedom House
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