Analysis |

The Year Israel Defied All the Economists' Expectations

Twelve months ago, Israel’s economists predicted political instability and a sluggish COVID recovery. They were wrong. Despite its slim Knesset majority, Israel's new government put economic policy back into motion

David Rosenberg
David Rosenberg
Yair Lapid and Naftali Bennett talking in the Knesset after forming their government of change last year.
Yair Lapid and Naftali Bennett talking in the Knesset after forming their government of change last year.Credit: Ariel Schalit / AP
David Rosenberg
David Rosenberg

Last Passover, Israel had just undergone another indecisive election and analysts were predicting more political and economic policy deadlock. Instead, we got the Bennett-Lapid government. The coronavirus was being conquered by vaccines, but the effect of COVID on the economy was expected to linger for months, or even years. It didn’t. Did anyone anticipate war in Europe? Hey, this isn’t 1939. Inflation? Wake up, we’re not in the 1970s.

The year since Passover 2021 has had more than its usual number of surprises – some for the good, some not. Here are five ways that the Israeli economy changed over the last 12 months...

Living with COVID

The conventional wisdom in the spring of 2021 was that COVID was history (thanks to Israel’s successful vaccine drive) but that it would take time for the economy, and especially the labor market, to fully recover from the pandemic.

Assuming that COVID contagion would not reach the levels of previous waves and that the economy wouldn’t have to cope with more lockdowns and other restrictions, the Bank of Israel optimistically predicted that the Israeli gross domestic product would grow 6.3 percent in 2021 and 5 percent in 2022. However, that recovery would take time to reach the labor market, where the central bank assumed the unemployment rate would remain an elevated 6.3 percent in 2021 before dipping to a still-high 5 percent in 2022.

How wrong the central bank was – and other forecasters, for that matter. The omicron variant brought a new and unprecedentedly large wave of COVID, but a less lethal one. Prime Minister Naftali Bennett decided against ordering the economy into lockdown; businesses, retailers and schools had adjusted to life with the coronavirus.

The result was that economic growth exceeded expectations, logging in at 8.2 percent last year and is on track to reach 5.5 percent in 2022.

Although some segments are still suffering, the job market bounced back far more quickly than economists had expected: The jobless rate was 4.1 percent at the end of December and is due to fall to historic lows this year – if the Bank of Israel got it right this time.

Inflation is back

A year ago, inflation was regarded as something that belonged to another generation, like CDs or the Labor Party. Last April, the Bank of Israel warned that consumer prices would indeed climb faster than we had grown accustomed to – to about 1.2 or 1.3 percent annually in 2021 and 2022.

Pedestrians crossing a street in Jerusalem earlier this year. The Israeli economy has bounced back quicker and stronger than expected from the COVID pandemic.Credit: Emil Salman

As the pandemic receded, economists assumed correctly that people would splurge on things like air travel and services, and spend the savings that had accumulated during lockdowns.

All this proved true. But what no one had anticipated was the breakdown of the global supply chain followed by Russia’s invasion of Ukraine.

The first signs of supply chain problems emerged in the summer of 2021 as the system, which relies on finely tuned links between factories, ships and ports, began displaying the effects of COVID disruption just as demand for products was taking off.

Counterintuitively, Israel’s import-dependent economy didn’t feel the full effect – in part due to the strong shekel – but inflation began to accelerate: the Consumer Price Index climbed 2.8 percent last year.

Since then, the war in Ukraine has made things worse by raising global prices for energy and food. Bond prices on the Tel Aviv Stock Exchange now point to 3.2 percent inflation this year, which would be Israel’s highest in more than a decade. To combat rising prices, the Bank of Israel last week raised its base interest rate for the first time in close to four years.

The ‘change’ government

The biggest change the Bennett-Lapid team has brought is change itself. From the day Avigdor Lieberman dropped out of Benjamin Netanyahu’s government in December 2018 until when the Bennett government was sworn in last June, nearly all governmental activity had been frozen. That included the absence of a state budget.

Despite its slim Knesset majority and wide ideological differences, the new government put economic policy back into motion. It passed a budget for 2022-2023, allocated $10 billion over five years to help develop Arab communities, reached a package deal on wages with the Histadrut labor federation, and is introducing a host of agricultural reforms and a few housing reforms too, among other things.

If the impact of all these reforms wasn’t discernible over the past year, it’s because they take time to accomplish their goals – which in most cases is lowering the cost of living.

There’s a lot more on the government’s to-do list: for instance, a bill allocating tens of billions of shekels for three metro lines in the greater Tel Aviv area, and another that would make it easier for young male Haredim to enter the workforce by lowering the draft-exemption age.

Shoppers in Jerusalem's open-air Mamilla Mall last month. Many consumers still prefer to visit brick-and-mortar stores than shop remotely.Credit: Emil Salman

Unfortunately, now that the government has lost its Knesset majority, the odds of any of that legislation going through are slim at best. In fact, there’s a good chance we’ll be discussing the next election around the seder table in 2023.

Life hasn’t changed that much

A year ago, predictions were coming fast and furious about how much COVID would change our lives: more people would work and shop remotely, abandoning crowded city apartments for more spacious homes away from urban areas. Office buildings and malls were contemplating a future of fewer workers and customers. The treasury was talking about turning office towers into apartment buildings.

Remote work hasn’t quite caught on. There is no good data on the phenomenon pre-COVID, although one government survey put it at less than 5 percent. COVID lockdowns naturally increased the rate of those working from home, but in the second and third lockdowns (there is no data for the first), they never exceeded 28 percent of all salaried employees, according to a Central Bureau of Statistics survey.

The rate has since declined to 12 percent at the end of 2021, and most of that was “hybrid” work where people alternate between work at home and the office. The remote revolution was over before it began.

At the pandemic’s peak, especially during lockdowns, statistics on credit card transactions either done online or by telephone showed spikes in remote shopping, according to a Bank of Israel study. But as the restrictions eased, the numbers fell to rates that were only moderately higher than pre-COVID.

The same trendline occurred in remote medicine. Pre-COVID, only 6 or 7 percent of family physician and pediatrician visits were done remotely. That grew about fivefold, to 30 to 40 percent, during the first lockdown, but didn’t repeat itself in subsequent lockdowns. By the end of 2021, it had drifted down to about a fifth of all visits.

The exception to the rule is government services: at the end of 2021, 80 percent were being conducted online. Apparently, people still prefer shopping in a brick-and-mortar store and being examined by a flesh-and-blood doctor. On the other hand, face-to-face contact with a government clerk … just give me my smartphone.

The war in Ukraine

Russia’s economy is in free fall due to sanctions, and Europe’s economy is also facing recession as it copes with the loss of Russian energy and higher food prices. For Israel, though, the war has yet to have much of an impact on the economy.

Two women walking past a sign showing currency exchange rates, in Moscow last month.Credit: Pavel Golovkin / AP

Israel had minimal trade relations with Russia and Ukraine, and to a large extent has been shielded from its impact on the world economy. The price for oil and coal (the latter of which is still used to generate much of our electricity) have soared, but natural gas is all produced locally and sold at fixed prices. Israel may even benefit from the crisis with increased arms exports to a nervous Europe, and higher prices and bigger sales of potash to meet the global fertilizer shortage.

Plans to export natural gas to Europe, which were all but dead in the water a few months ago, may come back to life as the Continent tries to wean itself off Russian energy.

Israel’s main problem is image. Fearing that Russian President Vladimir Putin will wreak revenge by preventing Israel from conducting sorties over Syria, Bennett has chosen not to join the Western sanctions regime. Worse still, Israeli institutions and many of its leaders have developed strong ties with Russian-Jewish oligarchs. We also have a large population of ordinary Russians, all of which makes Israel ripe as a center for sanctions-busting.

However, there is no sign of that happening. The government is on guard to avoid any embarrassing incidents, and few Israeli businesses are likely to risk running afoul of the authorities in Washington and Brussels as Israeli trade and investment relations are too intertwined with the United States and Europe.

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