For about a decade now, the exploitation of new natural gas reserves in the Eastern Mediterranean has had significant economic consequences for producing countries, and has been upgrading the region’s position on the international gas market. Egypt still dominates the sector, with significant reserves and export infrastructure, but Israeli production is increasingly impacting the region’s exports. 2022 was a very favourable year for the sector due to rising prices and European demand. Despite the current decline in prices on the European market, this trend should continue in the coming years
Israeli economic performance was particularly strong in 2022 and remained above OECD average. Growth was very buoyant thanks to the dynamism of consumption and investment, while the fiscal year should end with a surplus. Although relatively moderate, inflation accelerated during 2022 and forced the Central Bank to tighten significantly its monetary policy. Against this backdrop, which is not favourable to consumption and investment, activity should slow this year. The continued depreciation of the shekel was an additional inflationary factor. The fall in the exchange rate against the USD reflects the general strengthening of the dollar, but also Israeli investors' management of their assets in dollars. External accounts remain solid, thanks to strong competitiveness in some key sectors
The Israeli economy goes into 2022 in a favourable position. After a strong recovery in 2021, growth is likely to receive continued support from household consumption and exports. Although inflation is rising, it remains under control, which should allow the continuation of an accommodative monetary policy. Macroeconomic fundamentals remain very favourable for the shekel, although monetary tightening in the US and a possible correction in US equity markets could slow its rise. The vulnerability of public finances to an increase in interest rates remains limited, due to the essentially domestic financing of the budget deficit and the low risk of any substantial monetary tightening in the short term.
Fiscal support and the resilience of exports helped limit the economic recession in 2020. A strong recovery is likely in 2021, thanks primarily to a rapid vaccination campaign. The shekel has strengthened on the back of a growing current account surplus and massive capital inflows. The situation for public finances is more uncertain. In addition to the structural deterioration of recent years, the lack of a budget law against a background of repeated government instability is not helpful for budget consolidation. Although solid solvency indicators eliminate any short-term risk, a lack of reforms could weigh on potential growth over the medium to long term.
Israel is a small (population of 8 million), diversified and open economy (exports account for 40% of GDP). It is an OECD member. The standard of living of Israelis is one of the highest in the region with an average wage close to that of European countries. Activity in the US and in the Eurozone is a strong driver of Israeli GDP growth, and export diversification towards Asia is progressing.
Fiscal deficits are recurrent but are declining and easily financed through local and external markets. External accounts benefit from export performance in hi-tech services and will continue to improve with the development of gas production. Foreign direct investment (FDI) inflows are large and concentrated in the hi-tech sector. The banking and financial sectors are at a moderate stage of development and benefit from relative isolation from international capital market volatility. Income inequality and a relatively large proportion of the population below the poverty line are among the main issues the government has to face.
Israel’s territory is bordered by countries with security issues. Given a relatively diversified economy, development of the gas sector, sustainable investments in R&D to support competitiveness, and sensible economic policy, prospects are good for the Israeli economy. The shekel (ILS) tends to appreciate given recurrent and sizeable export revenues, which could be damaging to exports amongst non-hi tech industries.
