Outlook for 2011-15

• Following a breakdown of direct peace talks, the US faces an uphill struggle in its attempts to bring Israel and the Palestinians back to the negotiating table. Even if it succeeds, the chances of an agreement being reached remain low.
• An eventual fracturing of the current right-wing coalition still appears likely at some stage. If this happens, the prime minister, Binyamin Netanyahu, will most probably try to strike a deal with the centrist Kadima party.
• We have raised our growth forecast for 2011 slightly, to 3.6%. But this will still represent a slowdown compared with 2010. The pace of expansion will accelerate in the latter part of the forecast period, to an average of 4.5%.
• Monetary policy will be tightened gradually over the next 12 months, with the base rate reaching 3% by end-2011. Policy will become increasingly restrictive thereafter, with the policy rate peaking at 6% in 2015.
• The budget deficit will continue to narrow. By 2015 we expect the overall fiscal position to be in surplus, helped by growing revenue from offshore natural gas.
• The New Israeli shekel will remain strong. The authorities may opt for temporary controls on inflows of short-term capital, in an attempt to curb further currency appreciation.

Monthly review

• US efforts to re-launch direct peace talks between Israel and the Palestinians came to nought, as Israel refused to submit to a new West Bank settlement freeze.
• Unhappy about the stalled peace talks, several Labour ministers-although not the party's leader, Ehud Barak-are still threatening to give up their positions in the government.
• The interior minister, Eli Yishai, who is also leader of the Shas party, is under heavy pressure. He has been criticised for the handling of the recent Mount Carmel blaze, which destroyed 5,000 ha of forest and claimed 43 lives.
• Unemployment rose to 6.6% in the third quarter, from 6.4% in the second-the first increase since the recession ended in the second quarter of 2009.
• The year-to-date budget deficit to end-November totalled NIS15.9bn, sharply down on the shortfall of NIS 28.1bn recorded in the same period of 2009.
• The current-account surplus rose to US$2.3bn in the third quarter of 2010, from US$2bn and US$1.6bn in the second and first quarters respectively. However, the latest data point to a renewed weakening in the trade position.