How does Israel’s economy look following two years of life under COVID-19?

Over the past two years, the entire Israeli economy has been affected by the COVID-19 pandemic. The pandemic was a shock to the economy, the labor market, healthcare, education, and other areas, while at the same time it served to accelerate processes such as the shift to work-from-home and distance learning. During the past year, there have been signs of an emergence from the crisis and the Israeli economy has recovered faster than expected, though the pace has differed across sectors. A Picture of the Nation 2022, one of the Taub Center’s flagship publications, was released this week and presents a comprehensive picture of the Israeli economy following two years of life under the COVID-19 epidemic. It also spotlights other interesting phenomena in the Israeli economy.

Israel’s GDP grew by about 6% in 2021 relative to 2019, which is only 2 percentage points less than forecasted. The deficit also shrank more than expected — from 11.4% of GDP at the end of 2020, to only 4.4% in 2021, which is significantly lower than the forecasts of the Bank of Israel and those of the Ministry of Finance (5.3% and 6.8%, respectively).

Nonetheless, some parts of the economy have not yet experienced a full recovery. For example, the debt-to-GDP ratio, which had been reduced to a level of 60% prior to the coronavirus epidemic, shot up as a result of the high level of expenditure and decline in GDP in 2020. As a result, the government will be spending more on servicing its debt. The Ministry of Finance is recommending a quick reduction of the deficit through an expansion of the tax base and cuts in expenditure, while the Bank of Israel is recommending a slower reduction in the deficit. Yet another possibility is to increase public capital through massive investment in infrastructure financed by increasing the deficit by 2 percentage points. This would be expected to accelerate growth while also causing a short-term rise in the debt-to-GDP ratio.

Another point worth noting is the drop of about 9% in private consumption and imports during the epidemic — a much higher rate than in other countries. Part of this was due to a drop of 34% on average in visits to retail outlets and in leisure activity, a larger decline than in other countries. In contrast, exports fell by only 1.9% due to the ability of the high tech sector to deliver its products throughout the crisis.

COVID-19 also had an effect on the labor market in Israel though it was relatively short-lived and was not distributed equally. By the start of 2022, regular unemployment (which is unconnected to COVID-related absences) had fallen to below its pre-epidemic level. In contrast, more than 70,000 individuals who had been employed prior to the crisis have still not returned to the labor force and apparently have given up their job search.

As noted, the epidemic had a differential effect by geographic region and by industry. The North was the hardest hit and experienced a drop in employment that reached 13% at one point. Smaller declines in employment occurred in Jerusalem and the South. The least affected regions were the Center, Tel Aviv, and Haifa.

While industries such as accommodation and food services were severely affected and slow to recover, industries such as construction and agriculture were less affected and some sectors felt almost no effect. In the case of another crisis, early identification of vulnerable populations and industries will help to focus assistance efforts. This includes determining which workers are most likely to benefit from vocational training.

In addition to the effects of COVID-19 on the labor market, healthcare, demographics, social welfare, and education, A Picture of the Nation 2022 shines a spotlight on some other issues: What are the characteristics of workers in the top wage decile in Israel? What explains the rising level of violence in Arab Israeli society? What are the characteristics of the South? What are the reasons for the low rate of attendance of young Arab children in supervised early childhood education and care frameworks? And what are the challenges facing the special education system in Israel? We hope you enjoy reading A Picture of the Nation 2022!