An Overview of Israel’s Economy
Israel is one of the most resilient and technologically advanced economies in the world. A small nation in terms of land area, Israel stands at the crossroads of three continents—Asia, Europe and Africa. It shares its borders with Lebanon, Syria, Jordan and Egypt. Despite regional geopolitical challenges, Israel has built a strong, stable and free market economy from scratch, which has demonstrated the ability to endure periods of crisis. Israel is a ‘high income’ nation as per the World Bank classification.
Israel was declared an independent state in May 1948. According to a 1975 report by the National Bureau of Economic Research (NBER), Israel’s per capita annual product at the time of its establishment was around $400-$500. Israel experienced high growth during 1950-70. During this period, Israel’s GNP increased (at constant prices) at an average annual rate of about 10.5% while its per capita GNP tripled.
In 1980, Israel’s gross domestic product (GDP) was recorded at $24.92 billion according to the IMF database. Its GDP per capita was $6,356.51. By 1990, its GDP was $60.72 billion in size while its per capita income had doubled to $13,035.68. In 2000, Israel’s GDP was recorded at $136.03 billion with per capita income of $21,641.3.
Israel’s economy showed its economic strength during the financial crisis of 2008-09. A 2010 note from IMF reads, “In the face of global crisis, Israeli output growth was amongst the last to fall below trend, among the mildest hit, and one of the earliest to stage a recovery.” The reason for Israel’s resilience during this period was largely due to a robust baking sector, high household saving rates, prudent fiscal and monetary policies, and structural reforms of the past decade. By 2010, its GDP was $238.36 billion, and its per capita income touched $31,278.05. Israel’s GDP was reported at $411.73 billion in 2020 with a per capita income of $44,320.72. In the same year, it was granted membership in the Organization for Economic Cooperation and Development (OECD).
In 2022, Israel’s economy grew by 6.5% to $521.69 billion. Its per capita income stood at $53,195.88. Israel’s high technology sector is the linchpin to its economy. The high-tech sector has witnessed the highest and fastest growth among all industries in the past decade. In 2022, the high-tech sector accounted for 18.1% of Israel's GDP and for 48.3% of Israel's total exports. Israel’s national expenditure on research and development (R&D) as percentage of GDP is among the highest among OECD countries; it stood at 5.6% in 2021.
Israel is a leading world diamond manufacturing and trading center. The Israel Diamond Exchange is one of the four leading diamond trading centers in the world and has over 3,200 members. Chemicals and chemical products is another prominent sector of its economy. In addition, its pharmaceutical market has witnessed a healthy expansion led by the government's support of the medicines and biotech sectors via grants, tax incentives and funding for R&D projects.
Some companies from technology, pharmaceutical and chemical industry listed in the U.S. are Mobileye Global, Inc. (MBLY), Check Point Software Technologies Limited (CHKP), Elbit Systems Limited (ESLT), Nice Limited (NICE), CyberArk Software Limited (CYBR) and Monday.com Limited (MNDY), Teva Pharmaceutical Industries Limited (TEVA), Taro Pharmaceuticals Industries Limited (TARO), and ICL Group Limited (ICL).
The U.S. is among the most prominent trade partners of Israel. Back in 1985, Israel and U.S. signed a Free Trade Agreement (FTA), which was America’s first FTA. The U.S. goods and services trade with Israel totalled an estimated $50.6 billion in 2022. Israel’s trade relations with the European Union (EU) are governed by multiple trade agreements, some of which address specific sectors such as agriculture (2010), pharmaceuticals (2012), and aviation (2018). Total trade in goods between the EU and Israel in 2022 amounted to €46.8 billion.
Israel’s economy entered 2023 with a current account surplus, a low debt-to-GDP ratio, and high foreign exchange reserves. Although economic activity remained buoyant, the global economic slowdown and agitations against the judicial reforms in the middle of the year did start to impact investments and economic growth. According to a report by the Start-Up Nation Policy Institute (SNPI), the cumulative investments in H1 2023 amounted to 3.7 billion, a 68% decline as compared to H1 2022. While the decline in investment in its high-tech sector is a part of a global trend, the magnitude of this decline can now be much bigger with the start of the war in October 2023.
In the backdrop of the war, the Bank of Israel Research Department revised its macroeconomic forecast wherein it estimates its GDP to grow by 2.3% in 2023 and by 2.8% 2024, respectively. The central bank has proactively placed certain measures to combat the situation, however, the depth and duration of the impact on its economy remains uncertain. The ongoing war will test the strength of Israel (and its economy), yet again.
Disclaimer: The report has been carefully prepared, and any exclusions or errors in it are totally unintentional. The author has no position in any stocks mentioned. Investors should consider the above information not as a de facto recommendation, but as an idea for further consideration.
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