The worst of the coronavirus crisis is still ahead of us. The signs are accumulating in Israel and globally that not only is the worst of pandemic not behind us but that it may grow worse. The prospects for a rapid recovery don’t appear to be on the horizon.
In Israel, the worst of those signs are in the labor market. The number of Israel joining the ranks of the unemployed is worrying. It’s quite possible that what we’re seeing now is a drizzle before the downpour.
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In normal times, about 1,000 Israelis lose their jobs every day, but most of them find work quickly. But the economy’s revolving door is broken – these days it is letting workers out but it’s not letting them in. Many employers say they plan to make more layoffs.
Prime Minister Benjamin Netanyahu and Finance Minister Yisrael Katz announced Sunday the extension until the middle of August of unemployment benefits for workers who were laid off or placed on unpaid leave. It will also apply to employed people of retirement age, who ordinarily aren’t entitled to jobless benefits.
The decision came amid the recognition that some 262,000 Israelis would lose their benefits at the end of June without any prospects of finding work. The extension gives them an economic lifeline of another few weeks. But some 100,000 self-employed people are getting no such help.
Netanyahu and Katz said they would consider further extensions later on and for good reason. Many of those unemployed were able to get their mortgage payments suspended until September, after which they will have to begin repaying again with the added cost of covering the frozen payments. That involves about 137,000 people.
Governments all over the world are wrestling with these same dilemmas. Economists estimate that about 40% of all jobs in the United States that were lost due to the coronavirus will not come back. Consumers are changing their shopping habits, households prefer to save rather than spend and many families are at risk of losing their homes due to non-payment of rent or mortgages.
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Recession or depression?
Both the International Monetary Fund and the Organization for Economic Cooperation and Development revised their outlooks for the world economy this month. The IMF now sees global gross domestic product contracting by 4.9% and the OECD by 6% in 2020. If they prove true, it will be the biggest drop in economic output in modern times.
The OECD estimates that Israeli GDP will shrink an even sharper 6.2% this year, and that assumes that’s there’s no second coronavirus wave. If there is, the world economy will shrink 7.6% and the Israeli economy by 8.3%. The previous forecasts for a recovery in the second half of this year have been shelved and the recovery in 2021 will be more modest than previously expected.
During the Great Depression of 1929-32, global GDP contracted by 15%. By one definition a recession becomes a depression when GDP declines 10% over a period of more than two years. We still face too much uncertainty to say the world is heading into a depression, but the decline in output is already big enough to make the concerns palpable.
David Shulman, an economist at UCLA’s Anderson School of Management, believes the crisis has reached the scale that it could lead to a depression. “To call this crisis a recession is a misnomer. We are forecasting a 42% annual rate of decline in real GDP for the current quarter, followed by a ‘Nike swoosh’ recovery that won’t return the level of output to the prior fourth quarter of 2019 peak until early 2023,” he said in an essay titled “The Post-COVID Economy” published last week.
Millions of people of jobs in restaurants ad personal services will disappear. “For too many workers, the recession will linger on well past the official end date,” Shulman wrote.
Shulman published his essay before the number of people being diagnosed with COVID-19 rose by about 40,000 a day, which suggests that the economic fallout of the coronavirus will be even bigger than what he spoke about. Even if a vaccine is developed, it will take time for consumer to return to their normal behavior, Shulman predicted.
The U.S. Congressional Budget Office predicts that U.S. GDP will only return to its pre-coronavirus level in another decade because if its impact on the structure of the economy. That will be felt all over the world because so many economies rely on U.S. consumption for their exports, among other things.
In the second quarter, world trade contracted an unprecedented 18.5%, according to the World Trade Organization. For all of 2020, it expects trade to drop between 13% and 32%. It’s not just the coronavirus but trade tensions between the U.S. and China and among other countries.
Export-oriented economies like Israel are being hurt badly. The developed economies being harmed most by the decline in trade are France, Italy, Spain, Britain and the U.S. – all of them major export markets for Israel. Israeli manufacturing continued to operate during the lockdown, but export demand dried up.
Israel’s Central Bureau of Statistics reports that merchandise exports fell 16% in January-May from a year earlier to 70 billion shekels ($20.3 billion). Service exports dropped 8.8% in March, mainly due to the drop in tourism (which is deemed a service export). for the second, quarter exports are expected to show a 10% drop.
The lockdown factor
Sweden and Denmark each adopted different policies to contend with COVID-19. But in Sweden, which kept its economy open, consumer spending still dropped by 25%, just a little less than the 29% in Denmark, which adopted a more conventional approach. In both countries, unemployment rose by two percentage points. New-car sales plunged 49% in Sweden and 40% in Denmark.
Without entering into the debate over which is more important, health or the economy, no one can ignore than consequences of figures like these. They show that economic activity didn’t decline just because of the lockdown but because of the public’s fear about the coronavirus. So long as the virus is with us, economic activity will remain constrained, even if there are no lockdown restrictions.
“Even without the lockdown, people would have stopped shopping because people will change their behavior while there is a pandemic around,” Dhaval Joshi, chief strategist for European investment strategy at BCA Research, told CNBC News last week. Even in Japan, where the rate of contagion has been among the lowest in the developed world, GDP is forecast to drop more than 5% this year.
In Israel, purchases done with credit cards have grown impressively since the end of the lockdown. Average weekly spending in mid-June was 1.05 billion shekels, slightly above the 1.04 billion in February before the onset of the pandemic locally. Spending for restaurant meals was about the same in June as it was in January. Sales of apparel, electronics and furniture are doing well. Only tourism is suffering big time.
Nevertheless, restaurants report that their turnover is down 60% from its pre-coronavirus levels. Chain stores at the big malls want to reduce shopping hours because they say there is not enough business to justify staying open for so much of the day.
One possible explanation for the seemingly contradictory trends is the “uncorked battle” phenomenon after an extended lockdown period. Israelis are spending big now after building up so much patent-up demand.
A depressed labor market
In any case, even if the credit card figures continue to remain strong, they don’t present the full picture. The Labor, Social Affairs and Social Services Ministry says that the number of people registering with the Employment Service was 68% higher in the first three weeks of this month than a year ago – 4,900 a week versus 2,900. That is three straight months on immensely elevated figures, which is bound to depress consumer spending going forward.
The labor market is the biggest source of fear. Employment figures in many countries are being biased higher because governments have spent heavily to preserve jobs and subsidize salaries. In practice, many of these workers are not really working. Their employers may discover they don’t really need them and their jobs won’t come back.
Research at the University of Chicago estimates that 42% of those laid off during the pandemic will become long-term unemployed because the coronavirus crisis is causing long-term changes in the structure of the economy.
In Israel, a survey by the Manpower placement firm found that employers expect the local labor market to contract 7% in the third quarter. Employers in finance, industry, retail and other segments have discovered that they can manage with fewer employees. There’s no reason to recall workers they put on unpaid leave.
In addition, companies face declining demand. Israel insurance companies were the first to recognize this and cut back, but others are sure to follow, even in high-tech, where before the coronavirus there had been a severe labor shortage.
The transition to work from home, which was supposed to take years but accelerated sharply during the lockdown, will have strong knock-on effects. In high-tech, for instance, where work-from-home has ballooned, each job generates two or three others. Cleaning companies have already announced layoffs since emptier offices don’t need to be cleaned nearly as often.
If tech and other companies decide to dispense with much of their office space, the impact will reverberate through sectors running from commercial real estate to small businesses that deliver lunches or sell office supplies. CofaceBDI predicted early in the pandemic that 70,000 businesses will go under in Israel this year, compared with 45,000 in a normal year.
What to do
In the face of the deteriorating global economic outlook, the IMF recommended policy makers act by continuing budgetary and monetary support for their economies while preserving central bank independence. In places where the coronavirus is severely restricting economic activity government must keep paying unemployment benefits and subsidize salaries for workers while providing grants and loans to businesses. To help workers in developing countries with big informal economies, governments should provide cash grants, medicine and basic large via local authorities.
In economies that have begun to reopen after lockdowns, governments need to encourage workers to return to their jobs. To those whose sectors haven’t recovered and may not for a long time, governments should provide retraining so they can join growing sectors. They must also help companies restructure, and when needed, writ off, debt.
On top of these specific measures, the IMF says governments should also be stepping up green investment and improve their social safety nets. The international community must help developing countries cope with rising debt.
Indeed, debt is a problem for the entire world. This year it will reach historical highs both in absolute terms and as a percentage of GDP. But the IMF says that bringing the level down is a long-term goal, not a short-term one that would undermine efforts at economic recovery.