The coronavirus crisis has had a major impact on trends in the Israeli economy. The researchers at the Taub Center have examined the immediate effects of the crisis on economic growth, unemployment, the deficit and the national debt, and monetary policy in Israel. They also examined government assistance in response to the crisis.
The coronavirus crisis drastically changed the trends in economic growth of the previous years.
- During the first three quarters of 2020, GDP dropped by 3% relative to the same period in 2019.
- According to the forecast of the Bank of Israel, the decline in GDP during 2020 will be 4.5%–5%. Given an annual rate of population growth of 1.9%, this implies a drop in GDP per capita of up to 6.9%, which will set Israel back about six years.
- According to the Bank of Israel’s optimistic forecast, GDP is expected to grow by 6.5% in 2021, which would result in a 5% lower GDP at the end of 2021 than expected without the crisis.
- The drop in GDP was accompanied by a decline in consumption, particularly during the lockdowns: average daily total credit card expenditure showed a drop in activity of 21% with the first lockdown in March, and a more moderate decline of about 10% with the onset of the second lockdown in September.
- In a breakdown by sector, expenditure in gas stations declined by 49% during the first lockdown and by 21% during the second. In the restaurant industry expenditure was reduced to one-third its normal level and by 34%, respectively, and in hotel and leisure industries expenditure was reduced to one-quarter and one-half its normal level. In grocery store chains, expenditure rose by more than one-third during the first lockdown.
As a result of the coronavirus crisis, many Israelis became unemployed or were put on unpaid leave, and the concept of unemployment was modified to fit the new circumstances.
- With the imposition of the first lockdown in March, almost one million Israelis were placed on unpaid leave.
- In March, the number of recipients of unemployment insurance benefits was ten times higher than in February, and in April it reached a peak of 22% of the labor force.
- After declining between the lockdowns, the rate of unemployment insurance recipients rose again during the second lockdown and reached 240,000 additional recipients.
The deficit and national debt
The crisis led to a major drop in tax revenues and a dramatic increase in government expenditures, increasing the deficit. The government will have to increase the national debt in order to cope with the crisis.
- In 2019, the deficit in the government budget reached 3.7% of GDP, which was significantly higher than the target for the year (2.9%).
- At the end of the third quarter of 2020, the cumulative deficit had already reached 12% of cumulative GDP for the year, quite close to the Bank of Israel’s forecast of 13%.
- Israel’s debt-to-GDP ratio was about 60% before the crisis. The increase in the deficit and the drop in GDP will result in a debt-to-GDP ratio of 76% in 2021 according to the Bank of Israel’s optimistic forecast and 83% according to its pessimistic forecast.
The Bank of Israel has initiated a series of measures to reduce economic turmoil and relieve the pressure in the capital markets.
- The Bank of Israel allocated $15 billion for swap transactions in order provide the banks with liquidity in foreign currency and NIS 50 billion for the purchase of government bonds in order to stabilize the market and reduce long-term interest rates.
- At the beginning of April, the Bank of Israel reduced the interest rate by 15 basis points to 0.1% and instituted a program of loans to the commercial banks in the amount of NIS 5 billion, which was earmarked for small businesses.
- The Bank of Israel has taken regulatory measures to provide for the banks’ capital needs in order to free up additional sources of credit for all sectors of the economy.
Government assistance in response to the crisis
The government’s economic program to deal with the crisis in 2020 totaled about NIS 139 billion at the end of November, which constitutes about 10% of the GDP in 2019.
- About NIS 16 billion was allocated to the Ministry of Health and other ministries dealing with the crisis; of that, 93% was utilized by the end of November.
- About NIS 52 billion was allocated to the expansion of the social security net, of which only 77% has been utilized.
- About NIS 66 billion was allocated to business continuity programs, which includes assistance to businesses, but only 67% of these funds have been utilized.
- NIS 4.6 billion was allocated to a program for the acceleration and development of the economy, but only 40% has been utilized.
- The overall rate of utilization of the economic program for 2020 for the months March to November is 73%.
- The total size of Israel’s support programs that primarily involve direct fiscal stimulus is similar to those of other OECD countries, and is even larger in some cases. The size of programs for the deferral of tax payments and those providing guarantees for the business sector is significantly smaller in Israel than in other countries, which may become an obstacle in the recovery process.