Country Report Israel May 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 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 on Israeli-Palestinian peacemaking.
The government has said that it will introduce an 18-month budget for 2009-10. This is likely to include stimulus measures, which, combined with weaker revenue, will mean that the fiscal deficit will widen sharply.
We have revised down our forecasts for OECD growth. The downturn will hurt demand for Israel's exports. The Israeli economy is now projected to contract by 1% in 2009 and to grow by 1.8% 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 new government of the prime minister, Mr Netanyahu, has spent its first month trying to determine where the US, Israel's key ally, stands on key foreign policy issues, namely Iran and the peace process with the Palestinians.
The new government's relations with Egypt have shown signs of improvement, after a rocky start. Relations with Turkey have become a concern following Turkish-Syrian joint military exercises.
The finance ministry has said that it will adhere to the policy of limiting real public spending growth to 1.7% a year, but this is likely to be adjusted. Given the collapse in tax revenue, it projects a budget deficit of some 6% of GDP.
After a series of interest rate reductions that saw the Bank of Israel's base rate fall by a cumulative 375 basis points, to just 0.5% in April, the central bank has left the interest rate unchanged for May as concerns over deflation dissipate.
The monthly change in the CPI in March was, at 0.5%, substantially higher than expected, suggesting that deflationary pressures are not as strong as had been feared. The biggest price rises were in property rental costs.
Israel's trade deficit fell sharply in the first quarter of 2009, compared with the same period of 2008, as both imports and exports continued to contract rapidly, albeit at a slower pace than in the fourth quarter of 2008.

Source: Country Report

This report covers the following industry codes:
SIC Code: 53;59;60
NAICS Code: 44;52