There's No Vaccine for Coronavirus Recession

Entrepreneurs won't risk opening a restaurant in a society under quarantine because economic stimuli make loans cheaper

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Maybe a vaccine will be discovered for COVID-19 but it won't work on the economy. Working on developing a coronavirus vaccine at the International Vaccine Institute (IVI) in Seoul.
Maybe a vaccine will be discovered for COVID-19 but it won't work on the economy. Working on developing a coronavirus vaccine at the International Vaccine Institute (IVI) in Seoul.Credit: AFP
David Rosenberg
David Rosenberg

I don’t expect anyone to take out their hankies and weep in response, but it is not easy being a politician or policymaker in these troubled times.

If you don’t speak with sufficient concern about coronavirus threat, you’re accused of putting your head in the sand and endangering public health; if you speak too strongly, you’re accused of creating a panic and endangering public health. Whatever measures you take are either too little, too late or an overaction that is going to do more harm than good. Even Chinese leader Xi Jinping, who has the advantage over leaders in democratic countries in that he can arrest his critics, hasn’t been able to avoid criticism.

Economic policymakers haven’t been able to escape criticism either. Beyond the threat to public health (there were 127,000 cases and 4,600 deaths worldwide as of Thursday morning), the economic fallout of the efforts to contain it is also serious.

So far, the odds remain good that more people could lose their jobs and businesses more than will ever suffer even the mildest symptoms of the virus. In Israel, as of Thursday, there were about 100 confirmed cases, but El Al Airlines alone has put as many as 5,000 employees on unpaid leave.

The message that Israel’s economic policymakers have been sending is that the economy is in good enough shape to weather the coronavirus. Others say exactly the opposite, mainly because Israel’s budget deficit has been growing, which means it won’t be able to afford to increase spending to keep the economy afloat. They point out that the Bank of Israel’s base lending rate is so low (0.25%), it has no effective room to cut it further to stimulate business.

Who's right? Come back in a year or two and I’ll be able to answer more confidently. As every responsible forecaster says, the economic impact of the virus hinges on how long it will last, how many people are infected and, importantly, how many people are quarantined.

Ready to rumble

Israel’s macroeconomic situation is about as good as it could be coming into the crisis. Consumers have been spending, unemployment is very low and the economy last year grew at double the average for its developed-country peers. Large-scale quarantines will depress growth this year, but unlike, say Italy, which has suffered years of anemic growth, economic activity would have to contract quite sharply and for a sustained period for Israel to actually slip into a recession.

The worriers’ main concern is the government’s ability to employ the usual recession-fighting tools of increasing government spending, deficits, and lowering interest rates. In that regard, Israel is admittedly less than ready.

Unless the Bank of Israel wants to experiment with negative interest rates, it has little room for maneuver. The treasury is hamstrung on two counts –  it has no budget (in lieu of the Knesset’s passing a 2020 budget last year’s is still in force on a month-to-month basis) and deficit spending is already relatively high.

However, the situation is not nearly as hopeless as it’s been made out to be.

A coronavirus downturn isn’t like other downturns. Economic activity is falling because workers and shoppers are confined to their homes. A lower interest rate won’t entice their employer to invite them back to work, much less buy new machinery and ramp up production. A small businessperson won’t risk opening a new restaurant because loans are cheaper. There is a cash flow crisis because businesses are generating fewer revenues or none at all, but if they need to borrow to tide them over, borrowing rates are at record lows already.

Under the circumstances, the treasury’s role is more relevant. A lot of businesses will need help, and the government has started doing that on a small scale with the loan-guarantee fund it announced this week. Its main job, however, should be to make sure the public health system is adequately funded and can do its job of containing the coronavirus and treating its victims. Of the 10 billion shekels ($2.8 billion) in extra spending Netanyahu pledged on Wednesday, 2 billion will go to healthcare and emergency services.

Israel has the money. The budget deficit is still high, but it has been slowing from its peak partly because the government can’t increase spending easily over 2019 levels and partly due to a surge of pre-coronavirus tax revenues.

Bank Leumi economist Gil Bufman estimates that if the pandemic runs its course within the next few months to deficit won’t exceed 4.5% of gross domestic product –  high, but about what you would expect at a time when a government is wrestling with an economic slowdown. Israel’s relatively low level of debt (about 60% of GDP) gives it room to boost deficit spending.

If the pandemic and its effects extend deep into 2020 or into 2021, Israel and the rest of the world will feel it hard. Whether one country, especially a small one like Israel, is coronavirus-ready or not won’t amount to a hill of beans in a globalized world economy. If China or the United States mismanages the crisis, their mistakes will reverberate to Israel, no matter what the treasury and Bank of Israel might do. 

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