Israel Business Forecast Report Q2 2008

US Slowdown, Gaza Effect: Good Reasons To Be Cautious The picture is not as positive as it was when we published our last Business Forecast Report, with assessments of the dangers to the US economy - including our own - having worsened considerably. Relations with the Palestinians have deteriorated as well, with hopes sparked by the Annapolis process now fading with the ongoing violence in Gaza. A glance at the Tel Aviv Stock Exchange shows that the glory days are, if not over, then certainly on hold. Although we do not see any collapse in investor confidence on the back of these dual threats, some cyclical correction in gross fixed capital formation and growth is implicit in our forecasts.

On the political front, we are pessimistic as to the chances of a rapprochement between Israel and the Palestinian Authority, with both leaders (Prime Minister Ehud Olmert and President Mahmoud Abbas) under pressure from their domestic constituencies not to make any concessions to the other. Indeed, both are being attacked by a more popular opposition: Likud on the Israeli side, and Hamas on the Palestinian side. We do not believe either will be willing to go very far to appease a US administration that is, in any case, on its way out.

Growth looks set to slow to a still robust .0% this year, in spite of a slowdown in investment and exports. We concur with Finance Minister Ronnie Bar-On's assessment that 'recent events are likely to precipitate a slowdown in economic growth, but not a recession'. Key risks would be for this cyclical slowdown to coincide with higher inflation - we are somewhat concerned by the central bank's aggressive easing cycle, as well as still high commodity prices - but this is not our core scenario. On the positive side, though, unemployment has fallen a long way in recent years, having dropped from 10.9% in Q 0 to 6.7% in Q 07, and we do not expect the forthcoming slowdown to have any major impact.

The Israeli business environment has been much improved over recent years, as successive governments have sought to regain investor confidence following the intifada and resulting economic downturn in 2000-2002. Infrastructure is easily the country's strongest area (with a score of 80.0 in our ratings), and while institutions and market orientation still leave something to be desired (with scores of 62.0 and 6 .2, respectively), thanks to the country's socialist heritage, they still compare favourably to those of other countries in the region. One particularly evident area of weakness is the difficulty in registering property: Israel is ranked 152nd out of 178 countries in this category of the World Bank's 2008 Ease of 'Doing Business Index'.

• Executive Summary
  • US slowdown, Gaza effect: Good reasons To Be Cautious
• Chapter 1: Political Outlook
  • SWOT Analysis
  • BMI Political Risk Ratings
  • Foreign Policy
  • The Gaza effect: Downside risks To Political ratings
  • As long as the West Bank and Gaza Strip act independently, then progress in the peace process is highly
  • unlikely, even if the Olmert administration can effect a rapprochement with Mahmoud Abbas and Fatah.
• Chapter 2: Economic Outlook
  • SWOT Analysis
  • BMI Economic Risk Ratings
  • Economic Activity
  • Investment To Help economy Weather Global storm
  • The global conditions suggest downside for most emerging market economies, and Israel is more exposed to
  • the US than most.
  • Monetary Policy
  • BoI erring From CPI-Focussed Mandate?
  • The Bank of Israel will continue to cut interest rates until the shekel weakens, in spite of the less propitious
  • inflationary climate we are seeing at the moment.
  • Fiscal Policy
  • Tax Cuts, Growth-Promoting Spending To Widen Deficit
  • We do not see the government matching 2007's strong fiscal performance this year, as it seeks to promote
  • growth in worsening macroeconomic conditions.
• Chapter 3: Special Report
  • Looking Beyond 2008
  • The Future Of The World, In Three acts
  • US: The rebalancing act
  • Unwinding The Imbalances
  • We believe that a substantial, multi-year shift in the US external accounts is under way.
  • China: What If We're all Wrong?
  • Our Core scenario For China
  • We are retaining our positive headline growth projections for China across the forecast period to 2012, with
  • our expectations of the continued success of the urbanisation process and export-driven growth model
  • underpinning our assumptions.
  • Japan: Immigration Key To long-Term Growth
  • Demographic Woes Portend long-Term Decline
  • Immigration remains the only realistic way that Japan can overcome its long-term economic challenges.
  • Section 4: Business Environment
  • SWOT Analysis
  • BMI Business Environment Risk Ratings
  • Business Environment Outlook
  • Institutions
  • Infrastructure
  • Market Orientation
  • Operational Risk
• Chapter 5: Key sectors
  • Food & Drink
• Executive Summary
  • BMI is forecasting sales growth of 18.3% in Israel's mass grocery retail (MGR) sector to 2012, which,
  • although solid, is low in comparison to the country's neighbours as a result of its higher level of development.
  • Autos
• Executive Summary
  • The extraordinary double-digit growth recorded in the Israeli automotive market in 2007 is not likely to last,
  • with BMI forecasting a downturn from 2010.
• List of Tables
  • Table: Selected Cabinet List
  • Table: Economic Activity
  • Table: Monetary Policy
  • Table: Fiscal Policy
  • Table: BMI Business and Operational risk ratings
  • Table: BMI legal Framework ratings
  • Table: Israel, Annual FDI Inflows
  • Table: Israel, Top export Destinations
  • Table: BMI Trade Ratings
  • Table: Israel Mass Grocery retail sales - Value by Format - Historical Data & Forecasts
  • Table: Israel Automotive Industry Historical Data & Forecasts (CBUs unless otherwise specified)