Israeli Economy Contracts at a 7% Annual Rate in First Quarter Amid Coronavirus Crisis

Bank of Israel says downturn for all of 2020 will be milder than its previous forecast but sees coronavirus impact lingering into 2021

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Tel Aviv's Carmel Market in time of coronavirus.
Tel Aviv's Carmel Market in time of coronavirus. Credit: Meged Gozani

The Israeli economy contracted at a 7.1% annual rate in the first quarter of 2020 amid the coronavirus crisis, its biggest decline in 20 years, the Central Bureau of Statistics reported on Monday.

The decline came as the Bank of Israel said it was holding its key lending rate unchanged at 0.1% for June, apparently with the aim of leaving it the option of cutting it to zero if conditions worsen.

The central bank also revised its forecast for full-year growth to a negative 4.5%, an improvement over the minus 5.3% it forecast in April. But it lowered its 2021 outlook to growth of 6.8% from a previous 8.7%. It said consumer prices would fall 0.5% this year and be virtually unchanged in 2021.

The forecast poured dampened hopes for a quick recovery from the coronavirus crisis, in contrast to 2009 when the Israeli economy rebounded quickly from the global financial crisis. As a result, it predicted that its base rate would be between nil and 0.1% in the second quarter of 2021.

“The coronavirus crisis has brought an unprecedented contraction in economic activity and a sharp increase in the number of job seekers. The gradual lifting of restrictions that the government imposed is being expressed in economic activity, but the damage has been significant and is expected to continue,” the central bank said.

“On the assumption that there is no additional wave of infections and a renewed tightening of restrictions … growth will resume in 2021, but the unemployment rate will still be higher at the end of 2021 than it was in the even of the crisis,” it said.

In a separate report on Monday, the statistics bureau said that in April more than 2.5 million Israelis – 64% of the country’s labor force – was absent from their jobs either all or part of the month.

The figure was much higher than an earlier one released by the Employment Bureau and the National Insurance Institute because they included workers, such as those in the public sector, who were told not to report to work but continued to receive their salaries.

In addition, the statistics bureau survey was based on interviews conducted until April 19 before the worst of the lockdown measures were lifted, so it’s less reflective of the current job market.

The statistics bureau figures didn’t show any significant rise in the official jobless rate.

In April, it stood at 3.3%, a slight decline from 3.4% in March. The labor force participation rate declined slightly to 62% in April from 62.7% in March and 62.8% in February.

The statistics bureau said the drop in first-quarter GDP was led by a 20.3% plunge in consumer spending in the first quarter, compared with the final quarter of 2019. On a per capita basis, spending on consumer semidurable products, such as apparel, dropped 9%, and on nondurables – a category that encompasses everything from food to personal services – dropped by 14.6%.

Merchandise and service imports dropped 27.5% and public spending declined 10.3%, the bureau reported.

Exports of goods and services posted a modest annualized decline of 0.5%. While tourism receipts (which are classified as a service export) plunged 84.5%, other service exports rose as did industrial exports, thanks to the start of natural gas sales to Egypt.

Investment in fixed assets dropped at a 17.3% annualized rate, but the bureau attributed that less to the coronavirus than to a drop in vehicle imports and to the completion of several major investment projects.

The statistics bureau’s figures cover January-March, although the brunt of the lockdown only occurred in April. In reference to May, the Bank of Israel said it detected a partial recovery.

“As of the middle of May, the standstill in the economic activity has been reduced by about half as restrictions were lifted. Immediate indicators of economic activity show that some sectors have recovered, but the overall level of activity remains low and the sectors where restrictions have not yet been removed are close to their nadir. The recovery has only been partially felt in the labor market,” it said.

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