Boston, MA -- (SBWIRE) -- 08/09/2012 -- Core Views Elevated risks of instability in Israel's neighbours, including Jordan, Lebanon, Syria, and the West Bank and Gaza, have raised political risks, and investors' risk appetite may be tempered by the potential for a spillover of instability into the country's borders. We highlight rising tension with Iran as a particular concern. The probability of a successful peace negotiation between Israel and the Palestinian territories has declined markedly, as the Palestinian Authority has sought reconciliation with Hamas and a unilateral path to statehood through the UN. The economy's growth momentum is set to slow in the quarters ahead. Headwinds from the slowing global economy, as well as higher energy prices - which will weigh on private consumption - will drag on headline growth throughout the year. We forecast real GDP growth of 3.2% in 2012, down from an estimated 4.8% in 2011. Major Forecast Changes We expect Israel's fiscal deficit to increase in 2012. Recently announced spending measures are a further signal that the government's fiscal consolidation plans have taken a back seat, while a precarious macroeconomic outlook will shrink tax revenues and push the shortfall further into the red. We have revised up our 2012 budget deficit forecast from 2.8% of GDP to 3.8%, compared with 3.1% in 2011. Key Risk 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 rapidly in the past few months. A sharp drop in prices could lead to a decline in residential construction, weighing on fixed investment throughout the year. A sharper-than-expected downturn in the global economy - which could be sparked by a credit event in Europe or a 'hard landing' in the Chinese economy - would hit Israel's economy badly. Exports have already been hit by stagnant demand in Europe and elsewhere, and a further slowdown in external demand would see the outlook for exports deteriorating even further.

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