Country Report Israel September 2009

Outlook for 2009-10

• The political outlook will remain uncertain, given the fragmented nature of the predominantly right-wing government headed 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.
• 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. Although revenue is stabilising, it will be weak, pushing up the fiscal deficit sharply, to an average of around 6% of GDP in 2009-10, a substantial widening.
• We have raised our forecast for interest rates slightly, but real rates will remain negative well into 2010.
• Given new data showing a fairly robust pick-up in economic performance in the second quarter of 2009, and improved global prospects for 2010, we have raised our GDP growth forecasts for Israel, but recovery will still be slow.
• Despite the weakness of the economy, price pressures remain in some sectors. Given this, and VAT rises, we have revised up our forecast for inflation.

Monthly review

• The stand-off between Israel and the US over a freeze on Jewish settlement construction in the West Bank has continued, with concessions offered by Israel still falling well short of international demands.
• Moshe Ya'alon, a senior Likud figure, and several other coalition members have criticised reported concessions on settlement building.
• In August the Bank of Israel (the central bank) raised its key interest rate by 25 basis points to 0.75%, making it the first central bank in the world to do so since the onset of global economic crisis in September 2008.
• The moves by the Bank of Israel in August on the foreign-exchange front have resulted in a stabilisation of the exchange rate at around NIS 3.80:US$1, but the currency's fundamentals remain strong.
• Stronger than expected real GDP growth in the second quarter of 2009 has confirmed that the sharp recession that began in the second half of 2008 is drawing to a close.
• The CBS's quarterly Labour Force Survey, published on August 27th, has confirmed that unemployment rose in the second quarter to 8%, from 7.8% in the first quarter, unsurprising given that unemployment is a lagging indicator.