Country Report Israel December 2008

Outlook for 2009-10

• The political outlook will remain uncertain following the failure of the new leader of the Kadima party, Tzipi Livni, to form a new government, and the consequent scheduling of an early general election in February.
• The opposition Likud party currently looks the most likely to emerge as the biggest party after the election, with Kadima close behind.
• If no party amasses more than 30 parliamentary seatscontrol over 61 seats is required for a majority coalitiona unity government may be formed.
• Israel is unlikely to attack Iran's nuclear installations unless it feels sure that weaponisation is imminent and that it can look to the US for support. The change of leadership in Israel will slow peacemaking efforts.
• Higher spending growth once the 2009 budget is passed, combined with weaker revenue stemming from the slowdown in economic performance, will push up the fiscal deficit in 2009, albeit to still manageable levels.
• The Economist Intelligence Unit has revised down its forecasts for OECD growth. The downturn will hurt demand for Israel's exports. We now expect real GDP growth in Israel to reach just 1.8% in 2009, rising to 3.2% in 2010.
• With the economy likely 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.

Monthly review

• Likud has pulled ahead in recent public opinion polls, which consistently suggest that it will emerge as the largest party in the February 10th general election.
• The truce between Israel and Hamas, in the Gaza Strip, came close to collapsing in November, following a flare-up in violence on November 5th when Israeli forces crossed into the Gaza Strip, but tensions have since eased.
• The Ministry of Finance and the central bank have constructed a policy response to the intensifying global downturn, but this has been made difficult by the political stalemate.
• The finance ministry unveiled a fiscal stimulus package in the second half of November totalling some NIS 22bn (US$6.1bn), although much of what was announced refers to repackaged existing spending.
• Real GDP growth declined sharply in the third quarter of 2008, to an annualised rate of 2.3%, down from 4.1% in the second quarter.
• The central bank cut its key interest rate twice in November by a total of 100basis points, leaving it at an all-time low of 2.5%.

This report covers the following industry codes:
SIC Code: 60
NAICS Code: 52