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Israel Business Forecast Report Q2 2014

  • March 2014
  • -
  • Business Monitor International
  • -
  • 46 pages

Core Views

Political risks remain elevated, despite a reduced likelihood of an attack on Iran and Syria. In particular, spillover effects from the civil war in neighbouring Syria remain high, and investor confidence may be tempered as a result.
We project real GDP growth in Israel to come in at 3.2% in 2014 and 3.5% in 2015, from estimated growth of 3.3% in 2013. Despite the beginning of natural gas production in the Tamar gas field in H113, the economy will remain in a soft patch, with fiscal austerity hitting consumer demand in 2014.

Major Forecast Changes

We project consumer price inflation (CPI) averaging 1.6% and 1.9% in 2014 and 2015 respectively, from 1.5% in 2013. Relatively modest inflationary pressure will allow the Bank of Israel (BoI) to keep interest rates low, which we forecast to come in at 0.50% at end-2014, from our previous forecast of 0.75%.

Key Risks To Outlook

House prices in Israel have risen rapidly in recent years, raising concerns that a bubble has formed in the property market. However, an increase in supply, coupled with macroprudential measures on the part of the government designed to bring down prices, have seen the market cooling in the past quarters. As a result, a sharp drop in prices is unlikely at this stage. A sharper-than-expected downturn in the global economy would hit Israel's economy badly. Exports have already been hit by stagnant demand in Europe and the US, and lower-than-expected growth in those markets would see the outlook for exports deteriorating even further.

Table Of Contents

Israel Business Forecast Report Q2 2014
Executive Summary 5
Core Views 5
Major Forecast Changes 5
Key Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Ratings 7
Domestic Politics 8
Reform Of Exemption Law Boding Well For Economy 8
We expect a proposal by the Israeli government to gradually increase the participation of ultra-Orthodox men in the military force will be
passed by the Knesset. Such reform will sideline ultra-Orthodox parties over the coming years, and positively impact the economy over
the longer term.
table: Political Overview 8
Long-Term Political Outlook 10
Will Long-Lasting Peace Be Achieved? 10
Over the next decade, Israel will continue to face external security threats from militant groups Hamas and Iran-backed Hizbullah.
Downside risks to stability stem from the potential for renewed conflict with Hizbullah across Israel's northern border, although any
peace settlement with the Palestinians would pose upside risks.
Chapter 2: Economic Outlook 15
SWOT Analysis 15
BMI Economic Risk Ratings 15
Economic Activity 16
Medium-Term Outlook Encouraging 16
We forecast real GDP growth in Israel of 3.2% and 3.5% in 2014 and 2015 respectively. The domestic economy will remain in a soft
patch, while accelerating growth in the eurozone and the US will lead to an improvement in net exports. Increasing exports underpin our
relatively bullish medium-term outlook for the economy.
Fiscal Policy 18
Budget Deficit Gradually Narrowing 18
The Israeli government's commitment to fiscal consolidation will lead to a gradual narrowing of the budget shortfall over the coming
years. The Israeli public debt will remain within manageable levels as a result, reassuring investors on the country's creditworthiness.
Monetary Policy 19
Another Cut Likely In 2015 19
Following the Bank of Israel's 25 basis points cut to benchmark interest rates to 0.75 % on February 24, we forecast interest rates
coming in at 0.5 0% at end-2014. Accelerating growth in the economy and increasing price pressures will lead to a reversal in the
central bank's dovish policy stance in 2015, with interest rates coming in at 0.75% by the end of next year.
Industry Forecast 20
Total Assets Back To Growth In 2014 20
Total assets in the Israeli banking sector will return to growth in 2014, largely as a result of low base effects. That said, a combination
of low interest rates, a stricter regulatory framework and slack growth in the economy will ensure that profitability will remain relatively
modest despite positive Q313 results.
Labour Market 22
Unemployment Rate To Increase Further 22
We see the job supply stagnating in 2014, while the supply of labour will increase over the coming quarters. We forecast the
unemployment rate in Israel to average 6.7% and 6.5% in 2014 and 2015 respectively, compared to 6.4% in 2013.
Economic Activity II 23
Manufacturing Activity Increasing Mildly In 2014 23
Although Israel's Bank Hapoalim Purchasing Managers' Index could cross the 50.0 level in 2014, it is unlikely to remain consistently
above such a threshold, indicating sluggish expansion in the manufacturing sector.
Economic Activity III 23
Weak Consumer Confidence In 2014 23
We expect consumer confidence to remain modest in 2014, suggesting slow expansion of private consumption over the coming
Chapter 3: 10-Year Forecast 25
The Israeli Economy To 2023 25
Long-Term Outlook Slow But Steady 25
We are forecasting steady, if unspectacular, growth for the increasingly developed Israeli economy over the long term. As ever, political
risks pose downside risks to our GDP growth forecasts.
table: Long-Term Macroeconomic Forecasts 25
Chapter 4: Business Environment 27
SWOT Analysis 27
BMI Business Environment Risk Ratings 27
Business Environment Outlook 28
Institutions 28
Infrastructure 30
Market Orientation 31
Operational Risk 34
TABLE: Top Export Destinations, US$mn 34
Chapter 5: Key Sectors 35
Autos 35
table: Auto Sales, 2010-2017 36
Tab le: Automotiv e Fleet - Historica l Data and For ecasts , 2010-2017 37
Food and Drink 39
tab le: Food Consumption Indicators - Historica l Data and For ecasts , 2010-2017 40
tab le: Alcoho lic Drinks Value Sales - Historica l Data and For ecasts , 2010-2017 41
tab le: Mass Groc ery Retai l Sales - Historica l Data and For ecasts , 2010-2017 42
Other Key Sectors 43
tab le: Oil and Gas Sector Key Indicators 43
tab le: Pharma Sector Key Indicators 43
tab le: Infrastructur e Sector Key Indicators 43
TABLE : Telecoms Sector Key Indicators 44
tab le: Defenc e and Security Sector Key Indicators 44
tab le: FREIGHT Transport Sector Key Indicators 44
Chapter 6: BMI Global Assumptions 45
Global Outlook 45
Global Growth Optimism Turning To Disappointment 45
Table: Global Assumptions 45
Tab le: Develop ed Stat es, Real GDP Growt H, % 46
Tab le: Em erging Mark ets , Real GDP Growth , % 47

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