Even before Warren Buffett sent his signal of faith, US investment bank Morgan Stanley called Israel's economy "almost perfect."
"Israel's new government is good news for the economy and financial markets," the firm's Serhan Cevik told clients in a report titled "Israel: Almost Perfect".
"The formation of a 'grand' coalition with a reasonable majority 67 of the 120 seats in the Knesset is a positive development that will help maintaining economic stability and pursuing further withdrawals from the Palestinian territories."
The report added that despite the expected increase in social spending, the new government was likely to remain broadly committed to fiscal prudence and structural reforms, which have already lowered real interest rates and set the stage for strong economic growth in Israel.
Morgan Stanley further noted that the leading indicators pointed towards strong growth momentum in 2006 exceeding the investment house's previous projection of 4.5 percent.
"Real GDP increased by 4.3% in 2004 and 5.2% last year, well above the dismal performance in the previous years and the latest set of indicators confirms the continuation of above-trend expansion in domestic economic activity as well as in exports," the report said.
Because of this above-trend pace, Cevik cautioned that the economy was running out of spare capacity. Nevertheless, the firm does not expect an inflationary spiral, "since the central bank has enough ammunition and the state of public finances remains supportive of price stability."
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