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. However, after reaching 3.4% of GDP in 2019, growth was abruptly halted and turned negative in 2020 (-2.2%) due to the outbreak of the Covid-19 pandemic. According to IMF estimates, GDP growth picked up to 7.1% in 2021, supported by relaxed restrictions measures and robust exports. Economic growth should remain vigorous in 2022 (4.1% of GDP) and 2023 (3.6%) (IMF), supported by a recovery in tourism, improved economic ties with Gulf neighbours and a booming technology industry (Focus Economics). In the long term, the increase in the proportion of low-skilled Har (ultra-Orthodox Haredim) and Israeli Arab communities and of the working population (expected to fall from 25% to 40% by 2045) are potential obstacles to growth.
In 2021, Israel’s economy rebounded strongly despite the forth wave of the COVID-19 pandemic. In response to the new surge in infections, the government tightened some restrictions on gatherings and launched a booster vaccination campaign in August. In the light of the recovery, policy support such as certain unemployment benefits and grants to hard-hit businesses were withdrawn (OECD). The economic crisis caused by the Covid-19 pandemic had a major impact on the country's fiscal situation. According to the IMF estimates, the budget deficit reached -9.8% GDP in 2020, and remained high in 2021 (-6.3% GDP). It is expected to decrease to -4% GDP in 2022 and -3.6% GDP in 2023. Similarly, public debt increased sharply since the pandemic, reaching 73.2% GDP in 2021, and is forecast to remain at this level in 2022 (73.2%) and 2023 (73.1%). After turning negative in 2020 (-0.6%), inflation increased in 2021 due to rising energy, food and housing expenditure prices (OECD). Estimated at 1.4% in 2021, it is expected to reach 1.8% in 2022 and 1.6% in 2023, within the central bank’s target range (IMF). In August 2021, the government adopted an ambitious reform programme aimed at boosting infrastructure investment, reforming the vocational system and improving business environment, in order to increase productivity to support a sustainable growth (OECD). Investing in pre-school education to improve skills and make growth more inclusive (OECD) and ensuring the social and economic integration of Arab and Haredim minorities (IMF) are some of the challenges faced by the country.
Israel has one of the highest living standards in the region. The average salary in Israel is similar to average salaries in Europe. However, 25% of Israelis live in poverty and inequality is relatively high, which explains the frequent social protests. Furthermore, households suffer from high real estate prices and costs of living. The unemployment rate has risen due to the global crisis caused by the Covid-19 pandemic and will reach 5.1% in 2021. According to IMF estimates, the unemployment rate will decrease to 4.6% in 2022 and 4.3% in 2023.
| Main Indicators | 2019 | 2020 | 2021 (e) | 2022 (e) | 2023 (e) |
|---|---|---|---|---|---|
| GDP (billions USD) | 397.94 | 407.10e | 467.53 | 501.41 | 529.32 |
| GDP (Constant Prices, Annual % Change) | 3.8 | -2.2e | 7.1 | 4.1 | 3.6 |
| GDP per Capita (USD) | 43,966e | 44,181e | 49,840 | 52,504 | 54,445 |
| General Government Balance (in % of GDP) | -4.1 | -9.8e | -6.3 | -4.0 | -3.6 |
| General Government Gross Debt (in % of GDP) | 59.5 | 72.0e | 73.2 | 73.2 | 73.1 |
| Inflation Rate (%) | 0.8 | -0.6e | 1.5 | 3.5 | 2.0 |
| Unemployment Rate (% of the Labour Force) | 3.8 | 4.3e | 5.1 | 4.6 | 4.3 |
| Current Account (billions USD) | 13.33 | 22.14 | 20.84 | 19.14 | 18.89 |
| Current Account (in % of GDP) | 3.4 | 5.4 | 4.5 | 3.8 | 3.6 |
Source: IMF – World Economic Outlook Database, October 2021
Note: (e) Estimated Data
Israel has a diversified and technologically advanced economy. The agricultural sector employs 1% of the active population while accounting for 1.2% of GDP (World Bank, 2020). The country's main crops are fruits and vegetables, cereals, wine, cattle farming. It has become a leading agri-tech country, “greening” the desert to grow most of the exported food. Israel is almost completely dependent on imports to meet its supply of food products. However, throughout the COVID-19 crisis, there were no reports indicating a lack of inputs (USDA Foreign Agricultural Service).
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 18.6% of GDP and employs 17% of the workforce (World Bank, 2020). 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. 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. Despite the COVID-19 pandemic, Israeli tech sector recorded a strong growth in 2021, raising record levels of investment for a second consecutive year (The Associated Press).
The majority of the workforce (82%) is employed in the tertiary sector, which accounts for 71.4% of GDP. Tourism remains significant despite the Israeli-Palestinian conflict, with a record of 4.55 million tourist arrivals in 2019 (+10.6 year-on-year), generating approximately USD 6.3 billion in revenues. The tourism industry was one of the industries most affected by the COVID-19 crisis. Less than 830,000 tourists entered Israel during 2020, a decline of 81.7% from the previous year. Between January and September 2021, only 243,600 tourists visited the country (Central Bureau of Statistics).
| 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) | 1.1 | 18.5 | 71.2 |
| Value Added (Annual % Change) | 1.9 | 2.8 | 3.4 |
Source: World Bank, Latest available data.
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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
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Internationally, apart from persistent tensions with the Palestinian Territories, the risk of conflict with Iran and its allies has increased following the assassination on orders of US President Donald Trump of the powerful Iranian general Ghassem Suleimani on 3 January 2020. In October 2020, Lebanon and Israel, formally still at war after decades of conflict (since 2006), began talks to address a long-running dispute over their maritime border crossing the potentially gas-rich waters of the Mediterranean. Israel also signed normalization agreements with Bahrain, the United Arab Emirates and Morocco in late 2020 and with Sudan in early 2021 (CIA World Factbook).
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.).
Source: World Press Freedom Index, Reporters Without Borders
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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