Country Report Israel October 2009

Outlook for 2010-11

• The political outlook will remain uncertain, given the fragmented nature of the predominantly right-wing government headed by Binyamin Netanyahu, but, despite some defections, the government is unlikely to be unseated.
• There is unlikely to be substantive progress on Israeli-Palestinian peacemaking despite renewed US pressure.
• The government's budget for 2009-10 is expansionary. Although revenue is stabilising, it will be weak, pushing up the fiscal deficit sharply, albeit to below the 6% of GDP target.
• Although the Bank of Israel (the central bank) has begun to raise its policy interest rate, it will move slowly, and real rates will remain negative well into 2010, only approaching historical norms in 2011.
• Having stagnated in 2009, the Israeli economy will post stronger but still modest economic growth rates in 2010-11, averaging just over 2.5% a year.
• Despite the weakness of the economy, price pressures remain in some sectors. Given this, and VAT rises, we forecast that inflation will not fall below the upper threshold of the 1-3% inflation target until 2010, falling further in 2011.
• New data for the first half of 2009 have led us to raise our estimates for the current-account surplus in 2009 and our forecasts for 2010-11.

Monthly review

• The foundation of the US government's revived Middle East peacemaking efforts??