Outlook for 2011-15

• The ongoing political upheavals in the Arab world could pose new threats to Israel's security, particularly if radical Islamist movements were to gain a stronger foothold in neighbouring Egypt and Jordan.
• Although the prime minister, Binyamin Netanyahu, still retains a majority in the Knesset (parliament) after the recent departure of Labour from his coalition, we expect a fresh election to be held before the due date of 2013.
• We have raised our growth forecast for 2011 for the third consecutive month, to 4%. The pace of expansion will accelerate further in the latter part of the forecast period, to an average of 4.6%.
• Monetary policy will continue to be tightened. We now expect the Bank of Israel (the central bank) to raise its base rate to 3.5% by December 2011, and to 6.25% by the end of the forecast period in 2015.
• The budget deficit will continue to narrow. By 2015 we expect the overall fiscal position to have moved into surplus.
• The New Israeli shekel will weaken in the short term, influenced by regional uncertainties and official attempts to curb inflows of "hot money". Later in the forecast period there will be a renewed appreciation.

Monthly review

• The mass protests that have shaken the Middle East, particularly those in Egypt that brought down Hosni Mubarak, have caused considerable anxiety in Israel, as well as prompting a new source of friction with the US.
• Mr Netanyahu is facing intensified squabbling between his coalition partners over religious issues. The leader of Yisrael Beiteinu, Avigdor Lieberman, has threatened to bring down the coalition if he does not get his way.
• Following discontent over rising prices, the government has been obliged to introduce a number of concessions-including a reversal of the recent increase in excise tax on petrol and an increase in the minimum wage.
• To finance these concessions, the government has announced a spending cut of 1% encompassing all ministries-excluding defence, education and welfare. Planned reductions in direct tax rates may also need to be postponed.
• GDP expanded by an annualised 7.8% in the fourth quarter of 2010, exceeding market expectations by a large margin.
• The Bank of Israel raised its base rate by 25 basis points to 2.5% at its meeting on February 21st, following a similar increase the previous month. It was the first back-to-back rise since January 2010.