Ekonomske analize
Israel

Israel

Population 8.7 million
GDP 40,273 US$
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Synthesis

major macro economic indicators

  2016 2017 2018 (e) 2019 (f)
GDP growth (%) 4.0 3.3 3.6 3.4
Inflation (yearly average, %) -0.5 0.2 0.9 1.3
Budget balance (% GDP) -2.1 -2.2 -3.2 -3.3
Current account balance (% GDP) 3.8 2.9 2.3 2.3
Public debt (% GDP) 62.3 60.9 61.5 61.5

(e): Estimate. (f): Forecast.

STRENGTHS

  • Low inflation and interest rates, strong growth dynamics
  • Highly skilled workforce attracting investments to strategic sectors (ICT, pharmaceuticals etc.)
  • Favourable business environment
  • Close political and economic relations with the United States
  • Natural gas production since mid-2013 from significant offshore reserves

WEAKNESSES

  • Dormant peace process with Palestine
  • Fairly high public debt level
  • Appreciation of shekel that may weigh on exports
  • Growing regional instability, security risks

Risk assessment

Low interest rates, solid private consumption support growth

After surging to 3.3% in 2017 and up to around 5% in the first half of 2018, private consumption will continue to support growth, thanks to the favourable employment conditions in the country, an accommodative monetary policy, a low level of inflation, and an expansionary fiscal policy. Because of full employment, real wages have been driven higher (a year-on-year increase of 3.4% as of July 2018 compared with an annual inflation of 1.4%), which will continue to support private consumption in the near future. As long as inflation remains in the government’s 1-3% target range, the central bank is expected to keep its rates at a low level. Although the bank could raise its rates in the first quarter of 2019, the amount would likely be small. Further supporting this positive trend, the Consumer Confidence Index continues to indicate positive sentiment, hitting a record high in September 2018. Strong consumer spending will also result in higher level of investments. In line with this trend, the main components (new domestic orders, production, inventories etc.) of Israel’s Purchasing Managers Index have indicated an expansion in the manufacturing productive capacities – although at a slower pace than a year earlier – with the ICT, machinery, mining, and transport vehicle industries set to benefit in particular.

 

Higher spending will widen the fiscal deficit

The government set the fiscal deficit target to 2.9% of GDP for 2019, but Israel’s social security agency’s decision to cancel its agreement to transfer its annual surplus to the budget starting in 2019 may further boost the fiscal deficit. Such a move would mean the government would lose a resource of close to USD 7 billion, which could widen the fiscal deficit as high as 5% of GDP. The deficit will also be triggered by rising defence and social spending in the fields of disability benefits, education, and healthcare. The government also targets the reduction of tax burdens for families. The increase in fiscal deficit will prevent the public debt level from falling, but this should not impact the country’s borrowing capacities from domestic and international markets.

The current account balance is expected to remain in surplus, although the surplus relative to GDP is expected to stall. Although exports, which account for about 30% of Israel’s economy, are expected to increase in the coming quarters, the strong shekel represents a challenge for further increases in exports. Import demand remains strong due to solid growth and higher commodity prices. Nevertheless, the deficit in trade balance will continue to be offset by the surplus in services trade on the back of strong exports in high tech services, such as IT consulting, computing services and software. This will help Israel’s current account to remain positive, which will in turn help the central bank to continue its interventions in the foreign exchange market and accumulate forex reserves.

 

Peace process remains stalled, political stability maintained

After the Arab Spring in early 2011 and the start of the Syrian civil war the same year, regional instability has increased significantly, causing a threat to Israel’s national security. Israel enjoys close relationships with its traditional allies, such as Europe and the United States, while it continues to develop economic relationships with Asian countries such as China and India. However, the peace process with Palestine remains hopeless due to bilateral tensions. The country also intends to create stronger relations with key Gulf countries in order to counter Iran’s power in the region which may help also improve trade ties.

Internally, Israel is one of the most politically stable countries in the region, and yet it is composed of a diverse society. The coalition government has decided to hold general elections on April 9 instead of November 2019 as previously scheduled. Early elections are expected to eliminate political stress and uncertainty, and to concentrate more ressources on maintaining growth, and fiscal stability and discipline.

 

Last update: February 2019

 

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