Country Report Israel February 2009

Summary

The political outlook will remain uncertain with an early general election scheduled for February 10th. The opposition Likud party looks the most likely to emerge as the biggest party after the election, with Kadima close behind.
The Economist Intelligence Unit expects that no one party will be able to dominate the Knesset (parliament) and a unity government will be formed, but it is likely to be deadlocked over major policy issues.
With Palestinian factions divided and Israel's political landscape fragmented, there is unlikely to be substantive progress in Israeli-Palestinian peacemaking.
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.
Owing to higher spending stemming from the Gaza conflict and the likely stimulus measures, combined with weaker revenue as the economy slows, the fiscal deficit will widen sharply in 2009, before stabilising in 2010.
We have revised down our forecasts for OECD growth. The downturn will hurt demand for Israel's exports. Real GDP growth in Israel is now projected to reach just 0.4% in 2009, before rising to 2.6% 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.

The Likud party remains ahead in public opinion polls taken just before the February 10th election, but its lead is slipping.
Israel and an Islamist group, Hamas, have called separate unilateral truces following the December-January conflict. Israel has responded to continued sporadic rocket fire from Gaza with further aerial attacks on militant targets
The Bank of Israel has cut its key interest rate by 75 basis points, bringing its intervention rate down to a record low of 1%, but commercial banks are no longer passing on the interest rate cuts to borrowers.
A sharp decline in tax revenue caused the budget deficit to widen significantly in December. As a result, the total deficit for 2008 reached NIS 15.2bn, equivalent to 2.1% of GDP, compared with a planned NIS 11.5bn.
A US-Israeli consortium has announced a major gas find off the northern Mediterranean coast. If verified, the find, which is estimated at around 88bn cu metres, would provide an important long-term boost to the economy.
Inflation moderated at the end of 2008 but the year-end inflation rate of 3.8% was still above the upper threshold of the 1-3% official target.

Source: Country Report

This report covers the following industry codes:
SIC Code: 82;47;49;1;10;15;60;39;70
NAICS Code: 61;48;22;11;212;23;52;31;72