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Israel is a small (population of 8 million) and open economy (exports account for 40% of GDP). It is an OECD member. Activity in the United States and in the Eurozone is a strong driver of Israeli GDP growth, although 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, and relations with neighbours and with the Palestinian territories have led to military escalations (2006, 2009, 2014 for example), but the economic consequences of those events tend to be limited. 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 ILS tends to appreciate given recurrent and sizeable export revenues, which could be damaging to exports amongst non-hi tech industries.

The economy is likely to be significantly affected by the Covid-19 pandemic, notably given poor political management in a context of a parceled parliamentary majority. Nevertheless, strong economic fundamentals will support the recovery.

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