Israel has an outsized effect on world politics for a nation the gross domestic product (GDP) of which is not among the 40 largest in the world. The International Monetary Fund (IMF) puts it in 43rd place with GDP purchasing power parity (PPP) of $273 billion in 2013. That ranks it barely ahead of Greece. While Israel’s place in the news is not based on its financial status, it is worth considering the numbers as a background for Israel’s position in the financial world, which is rarely mentioned.
Israel’s population is well off by one gross financial measure. GDP (PPP) is 25th with a per capita figure of $34,770, based on IMF numbers for 2013. That puts it on par with France and Finland. For contrast, the U.S. number is $53,101, which puts America sixth in the world.
Israel’s growth has been hampered by recent political and military conflicts with its neighbors. According to its Central Bureau of Statistics, its GDP growth in the second quarter was only 1.7%. As is true with most other developed nations, Israel’s central bank can cut interest rates in the hopes of helping the economy. But the action would have little effect as long as the country is fundamentally at war.
In general, despite the recent GDP improvement challenges, the IMF’s evaluation of Israel’s short-term financial future is relatively positive. IMF analysts came to this conclusion earlier this year:
Israel’s economic fundamentals remain strong. GDP growth is solid, unemployment is low, and inflation remains firmly anchored within the 1–3 percent target range. The financial sector is in good health and the external position is strong.
However, excluding the impact of a new large-scale natural gas production, growth momentum is expected to remain moderate, as planned fiscal tightening and a further strengthening of the currency will weigh on the economy and offset, in part, the pick-up in demand in Israel’s major trading partners. The economy also faces other important challenges: public debt remains high despite a noticeable decrease over the past several years; rapid house price inflation, if it persists, poses risks to financial stability; and the large employment and productivity gaps between the general Jewish population, the Ultra-Orthodox Jewish (Haredi) and Israeli-Arab communities, if sustained, could undermine the economy’s long-run growth potential.
This evaluation was made in February, when Israel was mostly at peace with its neighbors. At the time, the IMF forecast GDP growth of 3.4% for 2014 and unemployment at 6.7%. Neither is very different from the same numbers for the United States.
The CIA World Factbook points out that Israel’s economy is based primarily on services, at two-thirds of GDP last year. The agency says:
Israel has a technologically advanced market economy. Cut diamonds, high-technology equipment, and pharmaceuticals are among the leading exports. Its major imports include crude oil, grains, raw materials, and military equipment. Israel usually posts sizable trade deficits, which are covered by tourism and other service exports, as well as significant foreign investment inflows.
Since high-end services expertise is hard to match and relatively permanent, Israel should keep that edge for a long time. And its prospects have brightened recently for another reason:
Natural gas fields discovered off Israel’s coast since 2009 have brightened Israel’s energy security outlook. The Tamar and Leviathan fields were some of the world’s largest offshore natural gas finds this past decade. The massive Leviathan field is not due to come online until 2018, but production from Tamar provided a one percentage point boost to Israel’s GDP in 2013 and is expected to contribute 0.5% growth in 2014.
Despite recent military actions, Israel’s economy is strong currently and could get better over the next decade.