Country Report Israel April 2009

Summary

The political outlook will remain uncertain, given the fragmented nature of the predominantly right-wing government formed by the Likud leader, Binyamin Netanyahu. The government's majority is likely to be slowly eroded.
The Economist Intelligence Unit expects the new government to be deadlocked over major policy issues, including fiscal priorities as well as civil and electoral reform.
With Israel's political landscape dominated by a fractious right-wing coalition, there is unlikely to be substantive progress in Israeli-Palestinian peacemaking.
The government has said that it will introduce an 18-month budget for 2009-10. This is likely to include stimulus measures, which, combined with weaker revenue, will mean that the fiscal deficit will widen sharply.
We have revised down our forecasts for OECD growth. The downturn will hurt demand for Israel's exports. The Israeli economy is now projected to contract by 0.8% in 2009, before expanding by 2% in 2010.
With the economy expected to slow and other sources of inflationary pressure beginning to diminish, the central bank is likely to maintain a looser stance on monetary policy, but inflation should still decline in 2009-10.

After seven weeks of post-election coalition negotiations, Mr Netanyahu was formally sworn in as Israel's prime minister on March 31st at the head of a coalition government that controls 74 (of 120) Knesset seats.
Mr Netanyahu handed senior ministries to and created new posts for coalition allies, including the left-wing Labour party, which has left members of his own Likud party disenchanted.
The new government has announced a "100 day" economic programme while it draws up a budget to cover an extended period until end-2010. MrNetanyahu has hinted that current circumstances preclude further tax cuts.
The central bank has said that it will accelerate its programme of quantitative easing, deploying up to NIS 17bn (US$3.6bn). It has also said that it will continue its purchase of US dollars to boost foreign-exchange reserves.
The current account remained in surplus by US$1.6bn in 2008, despite a fall in export earnings in late 2008 and a decline in investment income. Israel remained a net creditor, however.
Recent developments in the labour market point to a rapid rise in unemployment accompanied by a slow erosion in average wages. The rise in new jobs ground to a halt in mid-2008.