Economic and Political Overview

flag Israel Israel: Economic and Political Overview

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Economic Outline

Economic Overview

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 and was performing well in the first part of 2023; however, the evolving conflict following Hamas’ terrorist attacks on Israel on 7 October had a strong economic impact. Israel's economy grew by 1% in 2024, according to the Central Bureau of Statistics' National Accounts report. A rebound in consumption helped avoid a deeper growth slump, with private consumption rising 3.9% year-on-year and public consumption increasing 13.7%, driven by government spending related to the conflict. According to the OECD, growth is projected to rise to 2.4% in 2025 and 4.6% in 2026, with demand composition shifting over time. Export growth is expected to pick up gradually, especially from the second half of 2025, including in high-tech services. Private consumption is expected to follow a similar trend. Government consumption will shift from supportive to restrictive. Investment will remain constrained by labour shortages, particularly in construction.

After a strong impulse, with the budget balance shifting from a surplus in 2022 to an estimated 7.5% of GDP deficit in 2024, fiscal policy is set to tighten by over 2% of GDP in 2025-26. Despite continued high military spending in 2025, the government plans to reduce the deficit by raising taxes and cutting civilian expenditures. Tax hikes include permanent measures like a 1% increase in the VAT rate, alongside more challenging changes such as income-tax threshold freezes. Defence spending is expected to decrease from mid-2025, though it will remain a higher share of GDP than before the war. The central bank is expected to keep the policy interest rate at 4.5% throughout the projection period. Israel spent ILS 100 billion (28 billion USD) on military conflicts in 2024, according to the finance ministry. This spending has significantly increased government borrowing and the country's debt burden. The ratio of public debt to GDP rose to 69% at the end of 2024, up from 61.3% in 2023 (official figures). Over the past two years, the ratio has increased by 9 percentage points, mainly due to Israel’s wars with Palestinian militant groups Hamas in Gaza and Hezbollah in Lebanon. Meanwhile, Israel’s inflation ended 2024 at 3.2%, up from 3% in 2023, according to the Central Bureau of Statistics. Officials attribute the inflation spike to war-related supply issues, while the central bank notes that demand also contributes to keeping prices high. Inflation is projected to rise to 3.6% in 2025, driven partly by the VAT increase (to 18%), before easing to 2.9% in 2026 as supply constraints improve (OECD data).

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 54,446 in 2024 by the IMF). The poverty rate in Israel slightly decreased from 20.8% in 2022 to 20.7% in 2023. However, relative poverty remains among the highest in the OECD, despite a consistent downward trend over the past decade. The unemployment rate remained at historic lows, standing at 2.6% at the end of 2024 — the lowest since the 1970s (data CBS), which points to a tight labour market, leading to a severe shortage of workers. Since work permits for Palestinians were suspended, few new foreign workers (0.4% of employment) have entered Israel, compared to 4% of employment before the war.

 
Main Indicators 2023 (E)2024 (E)2025 (E)2026 (E)2027 (E)
GDP (billions USD) 513.61528.07550.91584.77610.25
GDP (Constant Prices, Annual % Change) 2.00.72.74.83.1
GDP per Capita (USD) 52,64353,11154,37056,63157,991
General Government Balance (in % of GDP) -5.4-9.1-5.5-4.7-4.4
General Government Gross Debt (in % of GDP) 61.468.069.368.869.3
Inflation Rate (%) 4.23.13.02.42.3
Unemployment Rate (% of the Labour Force) 3.53.13.43.63.8
Current Account (billions USD) 24.9017.7724.3626.0226.36
Current Account (in % of GDP) 4.83.44.44.54.3

Source: IMF – World Economic Outlook Database, Latest data available.

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, accounting for 1.2% 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. Because of the war, Israel increased fruit and vegetable imports in 2024. According to the Ministry of Agriculture, 224,586 tons were imported between August 8, 2023, and August 7, 2024.

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 18.9% of GDP and employs 15.6% 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 centres in Israel: companies such as Intel, Microsoft, Cisco, IBM and Apple chose Israel as the site for their first development centres outside of the United States. Other important sectors of activity include textiles, diamond cutting and defence. Overall, the manufacturing sector is estimated to account for 11% of GDP. In 2024, Israel's industrial production dropped 1%, driven by a 5.4% decline in high-tech output, according to the Central Bureau of Statistics.

The majority of the workforce (83.6%) is employed in the tertiary sector, which accounts for 70.8% of GDP. The finance and insurance segment features major banks, a dynamic fintech landscape, and active real estate services. The IT and telecommunications cluster excels in digital services and software exports. Tourism is another key area, although it has been severely impacted by the conflict (961,000 tourists visited the country in 2024, compared to 3 million one year earlier – data CBS), while professional services—legal, consulting, and healthcare—play critical roles.

 
Breakdown of Economic Activity By Sector Agriculture Industry Services
Employment By Sector (in % of Total Employment) 0.8 15.6 83.6
Value Added (in % of GDP) 1.2 18.9 70.8
Value Added (Annual % Change) 2.7 5.5 6.3

Source: World Bank, Latest data available.

 

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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

See the country risk analysis provided by Coface.

 

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Political Outline

Current Political Leaders
President: Isaac HERZOG (since 7 July 2021)
Prime minister: Benjamin NETANYAHU (since 29 December 2022)
Next Election Dates
Presidential: June 2028
Parliament: October 2026
Current Political Context
Israel experienced serious political challenges in 2024 as a result of ongoing conflicts with Gaza and Lebanon. Beginning in October 2023 and continuing into 2024, the Israel-Hamas conflict caused significant losses and extensive damage in the Gaza Strip. Israeli military orders and airstrikes forced over half of Gaza's population to relocate to the southern city of Rafah by May 2024. Israeli hostages and Palestinian detainees were freed when a ceasefire between Israel and Hamas was mediated in January 2025. The truce is still shaky, though, and talks are still being held to ensure its continuation. At the same time, tensions on Israel's northern border with Lebanon increased. Hezbollah launched operations against Israel in October 2023, sparking a 14-month battle marked by cross-border violence. Throughout 2024, the conflict escalated as Israeli forces targeted Hezbollah sites in southern Lebanon with numerous airstrikes and ground operations. The war claimed many lives, including Hassan Nasrallah, the head of Hezbollah, who was killed in September 2024. In November 2024, Hezbollah was ordered to leave southern Lebanon as part of a truce. Despite the agreement, reports show that the ceasefire remains tenuous, with sporadic violence and Israeli military presence persisting in certain areas.
Israeli Prime Minister Benjamin Netanyahu is under heavy political pressure as a result of these confrontations. The continuance of military operations in Gaza has caused division in his government, with ultranationalist cabinet members calling for the reoccupation of the territory. Furthermore, Netanyahu is under international criticism for Israel's military operations and their humanitarian effects, especially in relation to the uprooting of Palestinian civilians and the devastation of Gaza's infrastructure. Strategies to fight Hamas, challenge Iran's regional influence, and the effort to normalize relations with Arab countries have been the main topics of recent discussions with U.S. President Donald Trump. However, divergent views on the creation of a Palestinian state and the relocation of Gazans to nearby nations—proposals that have encountered regional opposition—complicate these talks.
 Eections are scheduled for October 2026; however, there is international and internal pressure on the current government to call snap elections.
Main Political Parties
The Israeli political system is based on proportional representation. No party is in a position to assume power independently, so political groups often co-operate and form coalition governments. The political parties represented in the Parliament are:

- Likud: national liberal party, right-wing, nationalist
- Yesh Atid (There is Future): centre, liberal
- Zionist Union: centre-left
- National Unity: a political alliance made up of the Blue and White party and the New Hope party, centrist
- Shas: zionist, populist, conservatism
- United Torah Judaism: right-wing, conservatism, religious
- Otzma Yehudit: far-right, ultra-nationalist, anti-Arab
- Yisrael Beiteinu: conservatism, nationalism
- United Arab List (Ra'am): Arab political party, it is the political wing of the Southern Branch of the Islamic movement
Hadash-Ta'al: a joint list of the Ta'al party and Hadash political coalition, left-wing, endorses the two-state solution
- The Democrats: socail-democratic, formed by the merger of the centre-left Israeli Labor Party and the left-wing Meretz party in 2024
- Blue and White Israel Resilience Party: centrist, liberal Zionist party.
Type of State
Israel (official name: State of Israel) is a nation-state based on parliamentary democracy.
Executive Power
The President is the Head of the State and is elected by the Israeli parliament, the Knesset, for a seven-year term. His/Her role is essentially ceremonial. The President chooses the leader of the party or majority coalition in the Knesset to attempt to form a government and exercise the functions of the Prime Minister. The Prime Minister does not have a fixed four-year term; the duration depends on the stability of the government, as elections may be held earlier if the Knesset is dissolved. The Prime Minister is the head of the Government and holds the executive power, including the execution of the law and the management of the country's current affairs. The Cabinet is chosen by the Prime Minister before being approved by the Knesset.
Legislative Power
Legislative power in Israel is unicameral. The Knesset (parliament) consists of 120 members, elected by universal suffrage for a four-year term. The Knesset can dissolve itself by passing a bill with a simple majority, which typically leads to early elections. A vote of no confidence, however, can result in the formation of a new government without dissolving the Knesset. The Prime Minister cannot dissolve or veto the Knesset. Israeli citizens have significant political rights, including voting rights, freedom of speech, and the ability to form political parties.
 

Indicator of Freedom of the Press

Definition:

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.).

World Rank:
86/180
 

Indicator of Political Freedom

Definition:

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.

Ranking:
Free
Political Freedom:
2/7
Civil Liberties:
3/7

Political freedom in the world (interactive map)
Source: Freedom in the World Report, Freedom House

 

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Latest Update: March 2025