Economists Revise Israel's Financial Outlook After Surprisingly Strong 3rd Quarter

The country's GDP is still expected to shrink for the year as a whole, but by less than previously expected

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Shoppers in Tel Aviv amid the coronavirus pandemic
Shoppers in Tel Aviv amid the coronavirus pandemic.Credit: Eyal Toueg
Nati Toker
Nati Tucker

A week after the government released its preliminary figures for Israel's third-quarter gross domestic product, economists and institutions are beginning to be more optimistic in their forecasts for the economy – for both 2020 as a whole and for 2021.

The Central Bureau of Statistics surprised forecasters for the better with a figure showing a 37.9% annualized jump in GDP in the three months from July through September, compared with the previous quarter, when first wave of the coronavirus pandemic was at its height in the country. It showed that GDP was down for the third quarter by just 1.4% from a year ago, among the lowest declines for developed countries.

The Finance Ministry is expected to issue a revised outlook shortly that will be considerably brighter than its current one. Its chief economist, Shira Greenberg, predicted in her most optimistic scenario a drop of 5.1% in 2020 GDP, with growth resuming at 5.4% in 2021. Her most pessimistic forecast saw GDP contracting 7.3% this year followed by tepid growth of 2.3% next year.

The Bank of Israel’s research unit, which had been expecting the third quarter to be stronger, is now reviewing its fourth-quarter outlook, taking into account the end of Israel’s second lockdown in mid-October and the gradual reopening of the economy. It had forecast a slightly smaller contraction than did the treasury of between 5% to 6.5% this year, but was more bearish on the 2021 outlook.

Meanwhile, the International Monetary Fund economist Iva Petrova said Thursday that the IMF would revise its Israel forecast to show a significantly smaller 2020 contraction. Until now, the IMF had been more pessimistic than other forecasters, seeing Israeli GDP shrinking 5.9% this year.

“The release showed very favorable numbers so we are certainly going to revise up our projection for 2020,” Iva Petrova, the head of the organization’s mission to Israel, said at a virtual press conference. “We expect a much, much lower contraction in 2020.”

Gil Bufman, Gili Ben-Avraham and Yaniv Bar, economists at Bank Leumi, Israel’s second-largest lender, have already upgraded their forecast to show GDP dropping 3.4% this year, rather than its previous estimate of a negative 5.5%

The third-quarter GDP jump followed the biggest quarterly contraction of the Israeli economy in 40 years. The turnaround came as Israel emerged in the third quarter from last spring’s lockdown. The second lockdown only went into effect in the final two weeks of the third quarter, so it had relatively little impact. The result was in the first nine months of the year, GDP dropped 3%, compared with the same time in 2019.

The Leumi economists said the third quarter turned out better than expected partly because consumer spending was given a lift by the ban on foreign air travel, which meant Israelis spent vacation money at home rather than abroad. In addition, merchandise exports did much better than expected while imports shrunk, which contributed to rising GDP.

A nearly empty Ben-Gurion International Airport during the COVID-19 pandemic.Credit: Ronen Zvulun/Reuters

As to the fourth quarter, Leumi expects the economy to shrink again due to the second lockdown and the continued partial closure of the economy. But in 2021, it expects GDP grow increase between 5% and 6%.

Jonathan Katz, chief economist at Leader Capital Markets, is also more optimistic now than he was before the third-quarter data came out.

“On the reasonable assumption that the Israeli economy will contract 10% to 12% in the fourth quarter [on an annualized basis] due to the second lockdown, we will end the year with a relatively small contraction of 3.5%,” he said.

The more moderate contraction will also help the government’s finances, principally by improving its debt-to-GDP ratio. That figure has been rising rapidly to a forecast of 80% at the end of the year as the state spends heavily to mitigate the impact of the coronavirus.

Although it generally praised the government’s response to the coronavirus pandemic, the IMF urged the government to pass the 2021 state budget promptly to help prioritize spending, position the economy for growth and reduce economic uncertainty.

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