Country Report Israel March 2009

Outlook for 2009-10

• The political outlook will remain uncertain, with the Likud leader, Binyamin Netanyahu, likely to form a right-wing government with the support of several small parties with differing, and at times conflicting agendas.
• The Economist Intelligence Unit expects the new government, which will probably take office by end-March, 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, although there may be some progress in talks with Syria.
• Owing to higher spending stemming from the Gaza conflict and 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 fall to just 0.1% in 2009, before rising to 2.2% 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.

Monthly review

• The general election on February 10th resulted in a close tie between the two most popular parties and has produced a deadlock over coalition-building.
• Although the ruling centre party, Kadima, gained one more seat than the right-wing Likud in the general election, the relative strength of the right in the poll has meant that Mr Netanyahu has been asked to form a government.
• Egyptian mediation has failed to produce a truce in the Gaza Strip between Israel and Hamas.
• The fiscal position is worsening as tax revenue has fallen sharply in recent months. The trailing twelve month deficit through to February 2009 stood at almost NIS1.7bn, ten times higher than the equivalent figure in February 2008.
• The rapid economic growth in the first half of 2008 has given way to a contraction in most sectors in the second half. GDP rose at an annualised rate of 1.1% in July-December 2008, down from 4.8% in January-June.
• The latest data on trade in goods, for January, shows a massive decline in the value of trade in both directions, but these trends are causing the overall trade deficit to narrow, as the terms of trade are now working in Israel's favour.