Israel Business Forecast Report

Economy On The Up Things are looking up for Israel, on the economic front at least: the recession is over, exporters are doing better and the central bank is sufficiently confident to start raising interest rates. On the political front, things are a bit more nuanced. Having snatched victory from the Left in this year's general election, Prime Minister Binyamin Netanyahu's biggest headaches are actually coming from the Right, particularly on the issue of settlements. Meanwhile, diplomatic relations remain tense.

Syria, Iran, Lebanon and Gaza are all key causes of concern for the defence establishment.

Netanyahu continues to find himself caught between the demands of the US - Israel's most important ally - and the wishes of his own governing coalition. The question of West Bank settlements is becoming a key battleground, in light of the Obama administration's insistence on a freeze of all settlement activity as a precursor to renewed peace talks with the Palestinians. Netanyahu has refused to make any promises to US leaders, and appears to be openly challenging them with his recent sanctioning of 450 new dwellings outside Israel's internationally recognised borders.

However, settlement leaders claim that this is just a smokescreen, hiding a ban on new building permits in the majority of settlements.

Israel has already bounced out of recession, with Q209 real GDP expanding by 1.0% y-o-y. This growth was partly driven by increased government spending, although private consumption also flipped back into positive territory, as did real export growth. Indeed, the pick-up in demand for Israeli exports was one of the first signs that a recovery was on the way. While we believe that annual GDP growth will still come in negative, to the tune of -0.9%, our 2010 forecast of 2.4% growth is more bullish. With the economy on the up, exports expanding and the consumer looking more optimistic, we are expecting interest rates to rise: the Bank of Israel's 25-basis-point hike in September is likely to be the first of many.

The slew of positive economic data in recent months highlights Israel's resilience, in the face of a global economic crisis. Its attractiveness to foreign investors is further illustrated by the fact that foreign direct investment actually rose in 2008, despite tight financing conditions worldwide, and the fact that Europe and the US - two of its biggest trading partners - were already sliding into recession by that point. However, improvements to the business environment could certainly be made, particularly in the area of intellectual property: Israel remains on the US trade representative's priority list, reflecting its concerns over the protection of intellectual property in the pharmaceuticals sector.