Israel: Political gridlock unlikely to knock economy off course
General elections on 17 September were inconclusive, with neither the right-wing nor left-wing groupings (led by Benjamin Netanyahu’s Likud party and Benny Gantz’s Blue and White alliance respectively) obtaining a majority in the Knesset. This could spell a potentially lengthy government formation process, and even the possibility of further elections. Irrespective of political paralysis, the economy should continue to impress.
On 25 September, the president tasked Netanyahu with forming a government. Netanyahu has 28 days to do so, although this will be far from straightforward. One option is for a grand coalition between Likud and Blue and White, although Gantz has already rejected this proposal as long as Netanyahu faces a potential indictment. Another option is for Netanyahu to persuade Avigdor Lieberman’s Yisrael Beiteinu party—which won eight seats, and thus has the role of kingmaker—to back him. However, Lieberman is firmly opposed to the presence of religious parties, which are a key component of Netanyahu’s support base in Parliament.
Notwithstanding political developments, growth should remain sturdy going forward, buttressed by a strong labor market, low interest rates and a boost to gas exports once the Leviathan gas field comes on line. That said, the lack of a strong government makes it difficult to tackle structural issues which could pose concerns in the medium-term, such as the sizeable fiscal shortfall, deficient infrastructure and an underperforming education system. On the FX front, political uncertainty is unlikely to significantly dent the value of the shekel given solid macroeconomic fundamentals; indeed, the shekel has actually strengthened slightly since the elections, likely tied to an interest rate cut by the Federal Reserve.