In Israel, restriction measures have been very stringent, and have severely affected consumer demand. The unemployment rate and the fiscal deficit reached record high levels in 2020. However, high-tech exports and fiscal support have softened the economic recession. A very active vaccination campaign should accelerate the recovery, but political uncertainty will continue to weigh on the fiscal outlook.
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.
