Macroeconomic Trends: An Overview

Key findings:

Israel’s economic recovery was more rapid than anticipated by the Bank of Israel, the International Monetary Fund, and the OECD. Due to the Covid-19 pandemic, the Israeli economy lost about 6% of its GDP in 2020, compared with what would have been expected for that year had the crisis not occurred. Private consumption fell dramatically by around 13% versus the growth that would have occurred without the pandemic (nearly double the decline in countries that suffered a similar drop in GDP), while public consumption increased in 2020 at a rate similar to that of the previous year. Israel was also unusual in that its balance of trade improved substantially due to a steep decrease in imports. The growth in public consumption, along with the sharp drop in imports, moderated the percentage of GDP decline.

The exceptional drop in private consumption may have resulted from the harsh preventive measures taken by the Israeli government, and was also evident in an approximately 4% increase in gross private disposable income. Gross private savings rose by about 8.5% of national income, evidently due to forced savings arising from restrictions on the consumption of services in the high-proximity sectors (sectors with high potential of contagion due to physical proximity). A sharp drop in consumer confidence may also partly explain the increase in private savings. Google’s mobility index for retail trade and leisure activities shows an average decline of 34% in the physical presence of consumers at commercial and recreational sites in 2020. This percentage is high compared with other countries, and is yet another indication that the impact of the pandemic and the closures was stronger in Israel. However, Israel’s decline in GDP per capita in 2020 was 5.7%, close to the OECD average. Per OECD assessments, Israel was expected to return to its Q4 2019 GDP per capita level only in early 2022, but the country recovered much faster, and GDP returned to that level by Q2 2021.

Government revenue is high, but so is the deficit: A look at government revenue, expenditure and budget surplus for the years 2020-2021 versus 2019 points to a dramatic increase in the deficit at the beginning of 2020, but the economy’s swift recovery led to revenue growth, such that revenues were even higher in early 2021 than they were in 2019. Government expenditures declined with the drop in morbidity and progress on the vaccination campaign, so the deficit dropped. After three quarters of 2021 the deficit amounted to 4.6% (versus 3.7% in 2019).

The budget earmarked for improved distance learning and for vocational training is not being sufficiently utilized: The total expenditure framework for pandemic-related economic relief in 2021 and in the coming years is NIS 82 billion. As of late September 2021, the budget implementation rate stood, on average, at 88%: 96% implementation for social security, 83% for healthcare and civil services, 85% for business continuity, and only 61% for acceleration and development of the economy. Particularly low implementation rates, capable of disrupting Israel’s economic recovery and return to a growth trajectory, were found for supplier credit insurance and additional credit, and for deferral/discounts on business licensing fees (0%), refunding of prepayments via the Tax Authority (2%), an accelerated depreciation benefit (35%), encouragement of high-tech investment by institutional entities (44%), digitization, including remote learning (42%), and vocational training programs (41%). For some items, such as vocational training, the under-implementation of budgeted expenditures may stem from conflicts of authority between government ministries, and from delayed release of the budget.

The Israeli economy can tolerate a temporary increase in the deficit and in the debt to GDP ratio: The nominal interest on Israeli debt ten years from now stood, on average, at slightly less than 1%. At a nominal growth rate of 4.9% per year, such an interest rate allows Israel to maintain an initial deficit of 2.2% and to return in the long term to a debt-to-GDP ratio of 60%, which will bring the fiscal deficit to a level of 2.8% of GDP. In terms of savings, the global markets do not seem to fear Israeli economic collapse. The markets assess the risk of Israeli state insolvency at one percent per year – a historic low as witnessed by a 40 basis point premium on Credit Default Swap (CDS) deals.

The labor market is recovering, but not enough: Per OECD assessments, Israel’s labor market was expected to return to its 2019 activity level only in early 2025, but here as well the data indicate a much speedier recovery. The vaccination campaign’s impact is particularly evident in this recovery, but 65,000 workers (0.8% of the labor force) who left the labor market due to the Covid-19 crisis have yet to return to it. Likewise, compared with the state of the market before the pandemic, there are an additional 100,000 unemployed persons, apparently from the entertainment, tourism, and leisure sectors, which were hit especially hard by the pandemic.