Israel’s Newest Lockdown Fulfills Economists’ Worst Case Scenarios

The third shutdown in 10 months will delay the recovery everyone had expected in 2021

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A scene from the first lockdown period in Tel Aviv.
A scene from the first lockdown period in Tel Aviv.Credit: Ofer Vaknin

Israel ended the second lockdown in October without an exit plan. Businesses reopened more slowly than in the wake of the first lockdown in the spring, but the government never blocked air traffic nor targeted specific population groups with higher morbidity rates for greater restrictions.

The rate of new coronavirus cases soared to more than 3,000 per day and now Israel is shutting down again, this time for two weeks, with the possibility of extending it another two weeks if the number of new cases doesn’t drop enough.

Starting Sunday, all retail will cease, except for delivery services and stores that do not serve customers directly. The “green tourism islands” of the Dead Sea and Eilat will be closed, and school hours will be cut back.

Israel’s third lockdown in just 10 months will inevitably force economists to downgrade their forecasts and undermines the brief burst of confidence the country enjoyed with the start of the coronavirus vaccine rollout. Here’s what to expect:

Cost to the economy: At a stormy protest in Tel Aviv on Sunday, signs read, “No more decrees – we’re taking our fate into our own hands.”

However, their fate is again being dictated by the state, and the economy is going to pay a heavy price, according to Finance Ministry Chief Economist Shira Greenberg’s numbers.

The restrictions that have been keeping restaurants, events halls and gyms closed until now has cost the economy about 500 million shekels ($155 million) a week. Greenberg estimates that this lockdown is going to boost that figure to 1.4 billion shekels, with other restrictions like shorter school hours that limit parents’ ability to work bringing the weekly cost to 3 billion shekels.

Lower growth in 2021: The lack of certainty over the spread of COVID-19 had caused most economists to offer two forecast scenarios: One in which the pandemic is brought under firm control and one where it’s not.

The treasury’s most recent forecast had used the most optimistic scenario as its central one. That predicted that gross domestic product would shrink by 4.2% this year but grow 4.5% in 2021 – and that was before the Central Bureau of Statistics published preliminary figures for the third quarter of 2020 that were much stronger than expected.

The treasury’s bearish outlook, which assumed that contagion levels remain high throughout most of 2021, saw GDP contracting 4.8% this year and growing just 2.4% next year.

The third lockdown is going to weigh less heavily on 2020, of which there is less than a week left, but it will impact 2021. The economy’s recovery will be much slower and growth for the year will likely be closer to the treasury’s worst-case scenario.

Unemployment: The broad jobless rate for the second half of November wasn’t encouraging. Even though street-front stores were allowed to reopen and schools resumed classes, the rate didn’t budge from the 14.6% of the first half of the month.

Nevertheless, economists had hoped that with the reopening of shopping malls and other relaxed measures, unemployment would fall in December. After the first lockdown, they noted, the rate fell below 10%.

With a third lockdown, the December rate is likely to remain high, close to the Finance Ministry’s most pessimistic forecast of 15% for the end of the year. The big fear concerns the approximately 300,000 people on unpaid leave, who are expecting to eventually return to their old jobs. However, the longer these workers stay home, the less likely it is that they’ll return to the job market anytime soon. Surveys by the treasury show that the longer they remain separated from the world of work, the more workers lack confidence that they’ll go back to their old jobs. For instance, in October 13% expressed such confidence, down from 17% in August and 37% in May.

Rising red: The drop in economic activity will almost certainly increase government spending to cover rising unemployment benefits and aid to businesses. It will reduce state revenues by reducing taxable income. The result is that the lockdown will result in the most pessimistic forecast regarding the budget deficit and public sector debt relative to GDP.

The treasury’s most recent forecast was that in the best case, tax revenues would come out 50 billion shekels short of forecasts in 2020. In the worst case, which seems to be the most probable one now, the shortfall will be 63 billion shekels.

The Bank of Israel expects the 2020 budget deficit to reach 12% of GDP and to range between 8% and 11% in 2021, depending on the coronavirus. Debt-to-GDP will grow to 72% this year and in the worst case to 83% in 2021. A third lockdown will cause the latter figure to grow even more.

Poverty: The suspension of business activity this year took the hardest toll on the self-employed. Salaried workers were automatically entitled to benefits, but aid to the self-employed has been less generous and more complicated to qualify for.

The National Insurance Institute estimates that the poverty rate for the self-employed rose by an astounding 20% during the pandemic, compared with just 5% for salaried employees (although in households where two breadwinners went on unemployment, the rise was 9%). Despite increased government assistance, overall Israel’s poverty rate has risen 4.2% during the pandemic.

In recent weeks the treasury has announced several programs to help businesses, but past undertakings have not been heavily utilized – only 40% of the money in a fund for state-guaranteed loans for at-risk businesses has been taken. BDI Coface estimates 56,500 business shut in the first 10 months of this year. The third lockdown will only boost that number.