Israel's recovery from the global economic downturn has been rapid. According to the IMF, Israel's speedy rebound reflects a combination of decisive official action and a strengthened macro-financial policy framework. Official growth estimates for 2010 confirm the strength of the upturn. GDP increased by 4.5% last year, compared with just 0.8% in 2009. Furthermore, the pace of expansion accelerated to an impressive 7.8% in annualised terms in the final quarter. Other indicators, including the Bank of Israel's composite state of the economy index, suggest that the momentum has been carried over into this year. Although the annualised GDP numbers probably exaggerate the underlying pace of expansion, we have increased our forecast for 2011 growth to 4%. This compares with 3.4% just three months ago. One point of concern is the current growth mix: domestic demand has taken over from net exports as the main driver of the economy over the last two quarters. As a result, we expect the Bank of Israel to step up the pace of tightening, in an attempt to rebalance the economy and head off the risk of rising inflation. Despite a more restrictive monetary policy, we expect GDP to expand by an average of 4.6% in 2013-15, as export growth picks up on the back of a steadily improving global environment.

Private consumption rebounded strongly in 2010, helped by low real interest rates, declining unemployment and rising real wages. However, the scale of the increase was accentuated by the low base of the previous two years. As a result, we expect the pace of growth to moderate to 3.6% in 2011, from 5.2% last year. Despite rising interest rates and a postponement of planned income tax cuts, private consumption will remain robust over the remainder of the forecast period, supported by a further tightening in the labour market. Over the 2012-15 period, we expect consumer spending to grow by an average of 4.1%.

After slumping in 2009, fixed investment jumped by nearly 12% last year. Although prospects for fixed investment will remain sensitive to international developments, the exploitation of large natural gas deposits in the Mediterranean-which will necessitate significant investment in pipelines, terminals and associated infrastructure-will provide an important fillip over the medium term. Residential construction will also continue to recover. De-stocking was still a drag on growth in 2010. However, we believe that inventory building will re-commence in 2011, and will gather pace in 2012-13.

With exports accounting for around 40% of GDP, the level of foreign demand will remain a critical determinant of overall growth. Export performance is likely to be comparatively lacklustre in 2011. Despite a continuing recovery in the US economy, import demand from developed economies-particularly in Europe-will remain subdued. The relative buoyancy of emerging markets will provide an important offset. Exports to Asia (especially China and India) have been growing at a rapid pace-by 45% in 2010. We expect these markets to continue to outperform over the forecast period.

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