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The Economy Has 'Long COVID' Too and We Can’t Ignore It

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Lockdowns, during which non-essential stores are closed, could last a long time
Lockdowns, during which non-essential stores are closed, could last a long timeCredit: Meged Gozany

It’s widely believed that our prime minister was betting back in December, when the government fell and the mass inoculations began, that by Election Day in March nearly all of Israel would be vaccinated. The economy would be back in business and the voters would be ever grateful for the miraculous recovery.

With some of his political and penal future hinging in such a rosy scenario, it’s understandable that Netanyahu was not being overly realistic. But he wasn’t alone in seeing a coronavirus vaccine as the magic bullet that would not only rid Israel of COVID-19 but bring an end to all our lockdown suffering.

As it turns out, Netanyahu succeeded in making Israel No. 1 globally for per capita vaccinations, but the coronavirus is still raging. Morbidity rates have come down, but not dramatically enough to justify anything like a return to economic normalcy. The British and South African COVID variants are so virulent that they are generating new cases faster than vaccines can prevent them. Also, experts predict that new variants will continue to arise and some may be resistant to the vaccine.

Maybe vaccination will yet suddenly work magic, but as things stand now, it’s reasonable to assume Israel faces at least several good months mired in a coronavirus economy of lockdowns and restrictions. We’re not in a good position to weather that.

Most readers will be shaking their heads at this, but the fact is that the Israeli economy managed relatively well during the crisis so far. Admittedly it bounced up and down between steep declines and sharp rises, but in the end the economy shrank a mere 2.9% in the first nine months of 2020 (the latest figure available). The unemployment rate, not counting people on unpaid leave, hasn’t risen dramatically from its very low pre-coronavirus level. Tax data show that the number of businesses that have closed during the pandemic has dropped significantly compared to pre-pandemic levels.

The Netanyahu government is correctly accused of mismanaging the crisis, but there’s no denying that the government has kept the economy afloat through this especially difficult period. It’s been handing out money to the jobless, lending money to business, giving every citizen a grant whether they need it or not. If the money wasn’t always wisely spent, it was spent generously and that was enough. 

The assumption behind all the spending in 2020 was that in 2021, the coronavirus would be behind us. The Bank of Israel, for instance, assumed in early January that in a “rapid inoculation” scenario (in which nearly everyone in Israel has been vaccinated by May), the economy would grow a powerful 6.3% this year and the budget deficit would shrink to a tolerably high 8% of gross domestic product.

We can't keep on this way

Rapid inoculation is proceeding apace, but the economy is still in lockdown and there aren’t many people still expecting a strong recovery anytime soon. Too many sectors, like retail, entertainment and tourism, will continue to be weighed down by COVID restrictions for the foreseeable future. Those restrictions create a lot of economic pain: The Bank of Israel found that last summer, when economic activity was approaching normal, turnover at no less than 12% of businesses was down 80% from pre-crisis levels.

The state’s largesse has hidden the true pain of the pandemic, but to achieve that, it posted a budget deficit of close to 12% of GDP last year, a level not seen since the fiscally disastrous days of the 1980s. Government debt has swelled to more than 73% of GDP at year end, up from 60%, erasing in one stroke years of efforts to bring the figure down. A year ago we had one of the lowest debt ratios in the developed world; today we have one of the higher ones. 

It can’t keep spending at those levels in 2021 (and dare I say, 2022) to prevent the economy from giving out under the weight of the pandemic.

Worse still, as time goes on, the props are destined to become less effective as businesses eventually succumb to slower economic activity, and the furloughed join the ranks of the officially unemployed.

The obvious answer to this dilemma is for the government to start spending smart rather than big.

But there’s little cause for hope on that account. We now face many weeks of elections and coalition talks, and the distinct possibility, according to the polls, that this fourth election will produce another stalemate and more political dysfunction.

The Netanyahu-Katz proposal for another round of handouts doesn’t augur well for sensible coronavirus economics. Israel needs to think hard about fiscal and economic policies, but it’s going to get more of the three-ring circus we’ve been witness to until now.

We can now expect the coronavirus to continue wreaking economic havoc for a good part of 2021 and probably longer.

When it’s finally over, however, our problems won’t end, they’ll just change.

At that point we’ll be trading the lockdowns and social distancing for the austerity economics of higher taxes and budget cuts. In turn, that’s going to weigh on future economic growth.

Israel entered into the coronavirus crisis in a good position economically, with a fast-growing economy, good fiscal metrics and a pandemic-proof high-tech sector. We’re going to come out of it worse for wear because we squandered those assets too quickly and too unthinkingly.

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