In a lower probability scenario in which the health environment deteriorates because of new virus mutations or vaccinations taking longer than expected, forcing further lockdowns, the economy would grow by only 1.9%, the ministry said, adding that its projection for 2020 is a 3.3% contraction.
Israel has been a world leader in vaccinating its population against the coronavirus.
"The economy will recover at the rate that had characterized the sub-prime (2008 financial) crisis," the ministry said of its main scenario, assuming "vaccination of the population in the first half of 2021 when, in this period, there are still limited health restrictions".
The Bank of Israel has estimated a contraction of 3.7% for 2020 and growth of 6.3% in 2021 if the rapid vaccination pace is maintained. That would fall to 3.5% growth in a slow-inoculation scenario.
According to the ministry, Israel's economy fared relatively well in 2020 and outperformed an OECD average of a 5.5% contraction. It cited minor damage to exports thanks to high-tech exports.
It noted, however, that unemployment remained high at 15.4% in 2020 and is expected to fall to 8.6% in 2021 in its base scenario and to 11.6% in a more pessimistic projection, with a decline in the average wage in either case.
Separately, in a third estimate, the Central Bureau of Statistics said the economy surged 39.7% in the third quarter of 2020 on an annual basis compared with the second quarter, reflecting an economy that was mostly open during the summer between lockdowns. The economy had contracted by 29.9% in the second quarter.
Another slight contraction is expected in the fourth quarter owing to lockdowns, while exporters have said they are also suffering because of an appreciation of the shekel. The currency last week reached 3.11 against the dollar, its strongest in 24 years.
The Bank of Israel, which has been reluctant to lower short-term interest rates beyond its current 0.1% rate on a view that rapid vaccinations will boost the economy, responded on Thursday with a pledge to buy $30 billion of foreign currency in 2021, up from $21 billion in 2020.
The shekel has since weakened to 3.27 against the dollar.
Growth in the July-September period was driven by sharp gains in exports (59.7%), private spending (42.3%) and investment in fixed assets (17.2%).
(Reporting by Steven Scheer; Editing by David Goodman)
By Steven Scheer