Israel's recovery from the global economic downturn has been comparatively rapid. In its Article IV consultation published at the end of November 2010, the IMF attributed Israel's speedy rebound to a combination of decisive official action and a strengthened macro-financial policy framework. Nonetheless, the immediate outlook remains uncertain. On the one hand, the latest GDP data (for the third quarter of 2010) appear to confirm the continued positive momentum, with output expanding by 3.8% in annualised terms. On the other hand, unemployment rose by 0.2 percentage points in the 3 months ending September (the first increase for 12 months), and exports appear to be encountering increasing headwinds. Clearly, these trends require close monitoring. But it is important to note the upturn in the jobless rate over the last quarter is largely due to a rise in the participation rate-arguably, a sign of growing confidence, as more people actively seek employment. In addition, we have revised up our 2011 forecast for US GDP growth from 1.7% to 2.2%, following an extension of the Bush tax cuts. Given the importance of the US market to Israel, this has prompted us to make a modest upward adjustment to our 2011 GDP forecast for Israel to 3.6% from 3.4% previously. From 2012 onwards, we believe that there will be stronger support for Israeli exports, as the global environment steadily improves. We expect GDP to expand by an average of 4.5% in 2013-15.

Private consumption rebounded strongly in the first half of 2010, helped by low real interest rates, declining unemployment and rising real wages. Consumer sentiment is likely to remain volatile in the short term. But improving external conditions combined with further tax cuts should lead to a steady strengthening in household spending from 2012 onwards.

After slumping in 2009, a significant recovery in investment is now under way. Fixed investment jumped by nearly 10% in annualised terms in the third quarter of 2010. Although investment prospects 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 a further fillip over the medium term.

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 our recent upgrade to US growth, import demand from developed economies-particularly in Europe-will remain subdued, although the relative buoyancy of emerging markets will provide a partial offset. The last three years of the forecast period will witness a renewed acceleration in export growth, as the global economy and world trade expand at a faster pace.

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