Analysis

If Coronavirus Doesn’t Kill Us, What About an Economic Collapse?

What’s worse, the illness or the cure? What’s going to kill more people: the coronavirus or a financial crisis? We’re about to find out

A youth rests on a pile of beach chairs at a beach in Tel Aviv closed over coronavirus, Israel, Tuesday, March 17, 2020.
Oded Balilty,AP

During one of the late-night meetings this past week with senior economic officials, the parties discussed the cost of the coronavirus pandemic to Israel’s economy – an estimated 30 billion to 100 billion shekels ($26 billion). These numbers were based on the assumption that the worst of the crisis will happen in April and May, and that as summer approaches, things will start improving.

Where does this forecast come from? Indeed, it’s not sure what will happen, but the prediction caters to the human need to seize on a forecast of some kind for the time being. The farthest that we can see at the moment is a bit after Passover. What will happen afterward? No one has any idea.

The discussions include economists and experts who have seen a crisis or two in their lives. But the short periods for which forecasts are being drafted are tied to the fact that no one has seen a crisis quite like this – for example, the speed at which the virus has spread. Plus there are the enormous requests being made of the public as the crisis severely crimps both supply and demand.

And especially, there’s the complete uncertainty regarding when the authorities will get the crisis under control and how many companies and employees will fall victim along the way. The statistic of how many people are ill has Israelis particularly concerned, and is updated every few hours. But there’s also a statistic no less frighting: businesses shuttered and employees laid off or on unpaid leave on a massive scale and at a frightening pace.

Anyone who thought two weeks ago that this was a problem mainly for hotels and airlines discovered very quickly that it affects nearly all sectors – commerce, industry, services, communications, transportation, energy and the public sector. No industry is immune to the crisis, and the longer it continues, the more businesses and workers will be sucked in. The National Insurance Institute estimates that Israel will have 400,000 unemployed by the end of the month.

Jaffa's Flea Market closed because of coronavirus restrictions.
Moti Milrod

From here, alongside the question of the degree the public will be subject to a shutdown, we have different estimates on the extent of the economic damage. The Finance Ministry’s chief economist, Shira Greenberg, predicted this week that Israel’s gross domestic product would be cut by 45 billion shekels. Others forecast 30 billion shekels, while Bank of Israel Governor Amir Yaron has predicted as much as 100 billion shekels.

Who’s right? The answer lies in which scenario you choose regarding the coronavirus’ impact on Israel and the world.

Greenberg based her prediction on the OECD’s midrange scenario regarding the coronavirus’ impact on global output – not the best and not the worst. At the current stage, any scenario is possible, and to know which one will play out, we need more time and more of an understanding about our capacity to get the virus under control.

Existential fear

The cliche “at least you have your health” has guided the Health Ministry from the start of the crisis and has dictated the government’s response. But the fast, major hit to the economy and the workforce has added another element to the cliche.

After all, it’s clear that high employment and serious economic troubles create an existential fear beyond the health-related fears, and on this point the economists are opposed to hermetically shuttering the economy (except for food and medicine). So far, their opinion has been heard only partially.

Economy Minister Eli Cohen, who opposes shutting down the economy, said this week, “People are talking about potential deaths from the coronavirus, but we also need to talk about how many people will die from stress, heart attacks and depression due to the recession and unemployment.”

Bank of Israel Governor Yaron has also been vehemently against shuttering the economy. This week he has repeatedly visited the Prime Minister’s Office in a bid to counter the Health Ministry’s pressure to close down nearly all activity in Israel.

Yaron said that sending the public and businesses into shutdown mode would make it “very, very hard” to get out of the economic crisis. Yaron and Finance Ministry officials understand that such a closure could cost the country massive sums and create an irreversible situation for many businesses, leading to a long recession. In other words, businesses that are currently being mothballed may never reopen. Every week their number increases.

It’s pretty clear that at some point the crisis will suck in the financial institutions. They may be in a good state at the moment, with lots of excess capital and many years of minimal credit losses, but a few weeks of a shutdown like this means a sharp drop in economic activity – and tens of thousands of businesses and hundreds of thousands of individuals not being able to pay their debts. And this will require a bailout by the Bank of Israel.

We’re still far from that point, but expanding the shutdown the way the Health Ministry is demanding means shifting toward a more extreme economic forecast model. This will require the government and the Bank of Israel to enter risk management models in an attempt to understand what’s going to kill more people – the coronavirus or a major economic crisis. If health takes priority, at what point could a severe economic crisis also cause a severe health crisis?