“Today we’re an approximately 90% economy,” Bank of Israel Governor Amir Yaron said in remarks at Tel Aviv University this week. He was referring to the situation for many of the world’s economies following the first coronavirus wave and the fact that they were operating at only partial capacity. The uncertainty, the crisis in the labor market and continued government restrictions have prevented economic activity from returning to precrisis levels.
The figure released Sunday by the Central Bureau of Statistics showing a 28.7% annualized drop in gross domestic product in the second quarter is already history, to some degree: Growth is expected to resume in the current (third) quarter, but according to all the forecasters, activity will remain significantly below what it was before the crisis.
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“While the second-quarter data look worrying, we should be more concerned about what will happen going forward,” said Ori Greenfield, chief economist at the Psagot Investment House. “In the second quarter, there was a sharp drop in consumption mainly because the economy was in lockdown and it was impossible to spend money even if you wanted to.
“However, when we look ahead and see a continued elevated rate of unemployment even after the economy has reopened, that the government programs have succeeded, in the best of cases, in keeping the public’s head above water, that companies don’t plan to increase investment for now due to the high degree of uncertainty, we can see that the ‘real’ recession has only started,” he said.
The dry numbers for the third quarter will show that the economy has resumed growth, even rapid growth, because they are starting from such a low baseline, Greenfield warned. “But in comparison with the precoronavirus economy, we are still going to be in a recession and it is reasonable to assume that the recession will continue for some time,” he said.
Prof. Rafi Melnick, an economist at the Herzliya Interdisciplinary Center, agrees the Israeli economy won’t be returning to real growth anytime soon. “We can’t talk about economic recovery as long as there’s no vaccine for the coronavirus,” he said. “There will be no growth until there’s a vaccine. There’s no reason to expect it, so the government should be saving its ammunition for the postvaccine era.”
It won’t work for the government to employ conventional countercyclical policies, such as distributing money to the public, he said.
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“The public’s response when they are uncertain about their employment and health will be different than in ordinary times. At this juncture, we need to provide basic subsistence to the unemployed, the self-employed and small businesses and to rehabilitate the health care and education systems,” Melnick advised. At the same time, the government must ready a comprehensive economic program for the postpandemic period.
If the government continues spending as if Israel were in a conventional recession, it will end up running up big deficits and more debt without any useful result, he warned.
The fact that the government is putting off passage of a budget means that development of the comprehensive Melnick speaks of is being delayed.
Prime Minister Benjamin Netanyahu expressed pride Sunday that the decline in Israeli GDP on a year-on-year basis (as opposed to the headline annualized quarter-on-quarter basis used by the statistics bureau) was much smaller than for many other developed countries.
Bank Hapoalim Chief Economist Victor Bahar said a better way to make the comparison is to compare country by country the drop in GDP for the first half of the year, when the coronavirus’ impact was at its most severe, and adjust it for the rate of population growth in the period.
In effect, Bahar is measuring GDP per capita and that to a degree changes Israel’s international ranking (see table). Israel’s decline is more or less in line with many European countries and very close to the U.S. rate of decline. But compared to Scandinavian countries, Israel’s performance was poor.
“The damage is linked to lockdown policies, but not only that,” Bahar said. “In Sweden, GDP didn’t fall a lot less than in Israel and there was no lockdown. Government policies also didn’t change the overall picture. You need to remember that government transfers [unemployment benefits and the like] aren’t part of GDP. They only become part of GDP if people use the money for consumption. In the U.S., a large part of its went to savings.”
Hapoalim also expects to see a jump in GDP growth in the current quarter from the second, especially in consumer spending. Nevertheless, the bank added, “In the context of the new normal that is emerging, the level of economic activity won’t return to its precoronavirus level and we forecast that GDP this year will contract by 7%.”
There has been a lot of talk of late about the damage to Israel’s credit rating due to growing concerns of an early election, the growth of public debt and the government’s policy missteps, most prominently its decision to make a one-time grant to all Israeli citizens.
Those concerns remain valid, but they should be taken in context. In an interview with the Times of Israel, Karen Vartapetov, the Frankfurt-based director for Standard & Poor’s Global Ratings, that developed countries were less likely to suffer a ratings downgrade than emerging-market countries that have less credible fiscal and monetary policies.
In Israel’s case, its economic fundamentals remain “strong” and its government institutions are “credible,” he said. S&P’s rating for Israel is higher than it is with the other two ratings agencies – Moody’s and Fitch, but its credit rating is under no immediate threat for a downgrade.
Vartapetov hinted that even if Israel holds a fourth election, S&P will wait to hear what the candidates are saying about fiscal policy rather than act automatically in response. “We really need to see some persistent and protracted weakness in economic and fiscal performance before we start moving the rating,” Vartapetov said.