Israel: Economic performer amid a fragile environment

Real GDP growth gained strong momentum in 2016, reaching +4% (up from +2.5% in 2015). Robust domestic demand was the main driver of growth, thanks to a strong decrease in unemploy-ment (from 9.4% in 2009 to 5.2% in 2016) and the deflationary context (average CPI down by -0.6% in 2015 and -0.5% in 2016). Private consumption rose by +6.1% in 2016 (+4.1% in 2015) while fixed investment surged by +11% (flat in 2015). As the latter will normalize, Euler Hermes expects annual growth to slow down but remain resilient at above +3% in 2017 and 2018.

Political risk will continue to nourish uncertainty, weighing on growth potential in the medium term. On 6 February 2017, the Knesset passed a law authorizing the government to “regulate the status” of private Palestinian land in the West Bank, likely to trigger international sanctions and potentially violent Palestinian protests. And the stance of the U.S. on the Israeli-Palestinian conflict needs monitoring as the Trump administration may break with the U.S. tradition on that matter. Regional instability remains a concern due to Israel’s proximity to countries at war (Syria and Iraq) or involved in geopolitical tensions (Iran and Saudi Arabia).