Country Report Israel July 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 eroded slowly.
The Economist Intelligence Unit expects the new government to be deadlocked over major policy issues, including fiscal priorities.
As Israel's political landscape is dominated by a fractious right-wing coalition, there is unlikely to be substantive progress on Israeli-Palestinian peacemaking despite renewed US pressure.
The government's 18-month budget for 2009-10 is expansionary. Combined with weaker revenue, this will mean that the fiscal deficit will widen sharply, to average more than 6% of GDP in 2009-10.
Although the first quarter of 2009 is likely to have marked the bottom of the downturn, the Israeli economy will be slow to recover. We expect the economy to contract by 1.3% in 2009 and to grow by just 1.5% in 2010.
Despite the weakness of the economy, price pressures remain in some sectors. Given this, and the Bank of Israel's looser stance on monetary policy and VAT rises, we have revised up our forecast for inflation slightly.
We have raised our forecast for the current-account surplus in 2009 following new data for the first quarter of the year.

Mr Netanyahu has declared he would accept a future Palestinian state in the West Bank and Gaza Strip, but has attached several conditions to his concessions that make it unpalatable to Palestinians.
Recent regional developments have generally been favourable from Israel's perspective, including the victory of pro-Western groups in the Lebanese parliamentary elections, although Iran remains a concern.
Mr Netanyahu has made several concessions in the 2009-10 budget in a bid to appease coalition colleagues, including revoking the application of VAT on fresh food and vegetables.
A Bank of Israel report has criticised the government's fiscal strategy, raising concerns about the Ministry of Finance's longer-term projections.
The fiscal deficit has expanded sharply, with the deficit for January-June 2009 reaching NIS 17.7bn (US$4.4bn).
Despite widespread fears that the sharp fall in export earnings would damage Israel's external position, recent data have shown that the current-account surplus widened significantly in the first quarter of 2009.

Source: Country Report

This report covers the following industry codes:
SIC Code: 37;49;60;53;59;48;2834;80;1;70
NAICS Code: 336;22;52;44;517;3254;62;11;72