Country Report Israel June 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 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% in 2009 and to grow by just 1.6% in 2010.
Despite the weakness of the economy, price pressures remain in some sectors. Given this, and the central bank's looser stance on monetary policy and value-added tax rises, we have revised up our forecast for inflation slightly.

Mr Netanyahu's meeting with the US president, Barack Obama, on May 18th served to highlight the policy divergences that have emerged between the two allies on several key issues.
Three days after Mr Netanyahu's meeting with Mr Obama, the Israeli army removed a small outpost and Mr Netanyahu authorised his defence minister, and the Labour leader, Ehud Barak, to dismantle 22 others.
Strong upward speculative pressure on the shekel has led the governor of the central bank, Stanley Fischer, to emphasise that the bank's purchases of US dollars to boost international reserves would continue.
The direction of the draft 2009-10 budget has become a mounting concern, with key spending targets abandoned and a deficit targeted at a level of 5.5-6% of GDP, despite objections by the Ministry of Finance.
The economy is suffering its first recession since 2002. Real GDP shrank at an annualised rate of 3.6% in January-March 2009, the second successive quarter of negative growth after a 0.5% fall in October-December.
The Labour Force Survey for the first quarter of 2009 has confirmed anecdotal evidence of rising unemployment. The unemployment rate rose from 6.5% in the final quarter of 2008 to 7.6% in the first quarter of 2009.

Source: Country Report

This report covers the following industry codes:
SIC Code: 10;60;70;49;20;47;37
NAICS Code: 212;52;72;22;11;311;48;336