Overshadowed by the influence of the US housing crisis, leading market followers and economists are predicting slower growth for the country's economy and stock gains in 2008. "Despite the rapid growth in 2007, there are increasing concerns regarding the potential for a certain moderation in the rate of growth in Israel in 2008 because of a significant slowdown in the US economy, which will affect private consumption, as well as the business sector there, and US-based demand for Israeli products in 2008," said Gil Bufman, chief economist at Bank Leumi, who forecasts GDP growth of 3.8 percent for the coming year. "Therefore," he said, "a slowdown in the rate of growth of Israeli exports to the US can be expected in 2008, compared to the rapid rate of growth seen in the 2006-2007 period." Bufman added that a pessimistic scenario that includes the US economy falling into a recession could result in Israel's export growth coming to a standstill in 2008. "Overall for the year, the rate of growth in Israel in 2007 is estimated to be above the previously published estimates by the Central Bureau of Statistics, which called for 5.2% GDP growth for the year," said Bufman. The Finance Ministry this week forecast GDP growth of 5.4% for this year. Figures published by the Central Bureau of Statistics on Monday showed that the country's economy grew 5.3% in 2007, expanding for a fifth year on the back of increased exports and consumer spending. "Just to demonstrate the point, in the first nine months of the year, the economy expanded by an annualized rate of 5.4%, compared to the same period last year, based on data excluding seasonality", said Bufman. Similarly, economists at Bank Hapoalim, predict a slowdown in the US and in other world markets as the pains of the subprime mortgage crisis are expected to be felt throughout 2008; therefore the bank estimated global growth at 4.5% in 2008, down from 5.2% in 2007. As a result of slower economic growth and a gradual tightening of monetary policy in 2008, the bank predicts that Israel's GDP growth will slow to 4.8% next year, but on a more promising note said that this was nonetheless "still a quite robust growth rate." The bank added that private consumption would continue to be a key growth engine expected to grow by 5% over the coming year, helped by further improvement in the labor market. However, since Israel's economy is dominated by a substantial degree of exposure to the US business cycle, a global slowdown will adversely affect the growth of companies because "more than half the revenue of Tel Aviv 25 companies originates overseas." "Profit growth from current activity by public companies will continue during 2008," said the bank. "However, it will be hard to beat the aggregate profit because of the effect of one-time profits in 2007." Sectors expected to show a mixed trend in 2008 include real estate and retail, while a positive trend is expected in corporate results in the pharmaceuticals, chemicals, food, energy and communications sectors. "Looking ahead to 2008, we believe the first quarter, will still be influenced by concerns over developments in global capital markets," said Yaron Fridman at Bank Hapoalim. "However, a positive trend is expected in the remainder of the year, though more moderate compared to recent years, due to strong data expected in the domestic economy. Estimates are that companies operating on the domestic level will enjoy continued growth in the economy in general, and in private consumption, in particular, in 2008." Joseph Wolf, senior analyst at Lehman Brothers, said that although it was highly unlikely, Israel will be immune to a more significant slowdown in the US, the country has proven to be more resilient than in previous episodes, as growth has remained strong so far reducing Israel's vulnerability to external developments. "We remain bullish on Israel into 2008 given strong economic trends," said Wolf assuming there was a 65% chance that the US will avoid a recession. "We expect GDP growth of 4.3% in 2008. Our top picks for 2008 are Bezeq, Israel Chemicals, and Israel Discount Bank." Inflation jitters Against the backdrop of strong economic growth, rising prices of raw materials and improvement in the standard of living, the Bank of Israel is again set to miss the inflation target range in 2007 and is also expected to run above the ceiling of the range of between 1% and 3% in the first months of 2008. "The consumer price index is likely to deviate slightly this year from the price stability target range as year-to-date inflation has increased 2.8%," said Bufman. To return the rate to within the 1-3% target range, Eyal Raz at Bank Leumi, said the Bank of Israel will continue the trend it has already started, of a moderate interest rate hikes, which likely will amount to a cumulative 100 basis points in the coming year. While Fridman at Bank Hapoalim expected interest rates to rise from the current 4.25% to 4.5% over the coming year, analysts at Prisma Investment house see interest rates rising to 4.75% and inflation retreating back to the upper bound of the price target range to 2.5% in 2008. Slowing gains Analysts and economists were in consensus that whatever the uncertainties are moving into 2008, this year had been a stunning one for investors on the Tel Aviv Stock Exchange. Looking ahead, however, matching the performance of past years was expected to be difficult to repeat. On average the analysts predicted that the TA-25 index would gain between 8% and 10% in 2008, after rising 31% in 2007. "2007 was the fifth consecutive year of double-digit returns in large-cap stock indices in Tel Aviv, with an increase of more than 30% in the Tel Aviv 25 index, which posted the most outstanding gains among the major indices in Tel Aviv this year," said Fridman, adding that the first quarter of 2008 would mainly be influenced by developments in markets abroad impacted by repercussions of the US subprime mortgage crisis. Yaron Pitaro, head of investments at Prisma Capital Markets, said the local main indexes would generate a smaller gain in 2008 than in previous years. "Although, the yield of the TA-25 index will be positive, we are less likely to beat performance of past years," said Pitaro. Looking beyond second half of 2008, Fridman, was positive that the local economy, believed to be good, will set the tone for the local equity market in the long-term, despite the volatility in global markets. Wolf agreed. "Clearly the market cannot go up every year, but we fail to see compelling reasons to be negative about the local economy or the overall market," said Wolf.