Analysis |

The Lockdown Is Easing, but Hard Times for the Israeli Economy Aren’t Over

Economists see ‘glass ceiling’ as spending and investment revive slowly

Avi Waksman
Avi Waksman
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A man walks past shuttered stalls in a Tel Aviv market, May 5, 2020.
A man walks past shuttered stalls in a Tel Aviv market, May 5, 2020.Credit: Moti Milrod
Avi Waksman
Avi Waksman

The gradual re-opening of the Israeli economy from its coronavirus lockdown over the last few days has encouraged cautious optimism about a near-term recovery. But the excitement over even a limited return to normalcy may soon be replaced by the realization that the effects of the coronavirus won’t dissipate so quickly as fears of a second wave of contagion continue to shadow economic activity.

Even under the rosiest scenarios, the economy isn’t expected to fully return to its pre-pandemic activity. Economists talk about a “glass ceiling” that will restrain businesses and consumers over the next several months and perhaps into 2021.

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One reason is that some restrictions will remain in force for some time; they will be ended at a much more gradual pace than they were imposed two months ago. If there are signs that COVID-19 is spreading again, lockdown measures will be revived.

Even if the measures are eliminated entirely, a large part of the public – how large, however, remains an unknown – will remain cautious, avoiding crowded places, such as restaurants and public transportation and even air travel. That, too, will weigh on the economy.

Even those who choose to resume their pre-coronavirus lifestyle will feel the impact of the pandemic in their pocket. Many businesses were shut during the Passover and Ramadan holidays, which are especially lucrative times of the year. They will have to compensate for the lost revenues and profit by cutting expenses and investment at least in the near term.

Many households will have to tighten their belts because breadwinners were put on unpaid leave or laid off. Others have suffered big losses in their investments.

Even those ready to go out and shop won’t find the experience as pleasant as in the pre-coronavirus days. The “purple badge” restrictions enforcing social distancing have led to long lines to get into stores and other places of business. That is cutting into sales turnover for many and increasing costs.

Businesses will adapt to the restrictions. Stores will make physical changes in their layouts to reduce physical contact and others will adopt technological fixes, such as devices to take temperatures without allocating staff to do the work. Some may require customers to schedule a time to visit a grocery store or fitness center and charge a reservation fee that’s refunded when the client shows up. But these changes will take time.

Consumer spending

Gil Bufman, chief economist of Bank Leumi, said on a forecast published last week that consumer spending would probably drop about 1.5% this year, compared with an average rise of 4% annually over the last decade. Bufman said the decrease would mainly come from a drop in the purchase of consumer durables, such as automobiles, furniture and home appliances.

“However, the longer it takes to exit the lockdown and resume normal activity, in particular, the longer it takes for workers who were laid off or put on unpaid leave to return to the labor market, so the damage to consumer spending be greater,” Bufman forecast.

It’s not just about consumer spending. In the International Monetary Fund’s latest forecast for the global economy, Chief Economist Gita Gopinath, spoke about the “scars” that will remain due to the drop in investment, bankruptcies and long-term unemployment.

The IMF noted that the fallout of the 2008 global recession remains to this day, among other ways in lower levels of investment than was the case before the crisis and a sharp increase in income inequality in the countries that were the most severely affected by the downturn.

Even in the IMF’s most bullish scenario, in which economic growth reaches an impressive 5.8% in 2021 after a 3% contraction in the economy in 2020, gross domestic product will be lower at the end of 2021 than what economists had been predicting before the coronavirus crisis.

“There is extreme uncertainty around the global growth forecast. The economic fallout depends on factors that interact in ways that are hard to predict,” the IMF said. “Many countries face a multi-layered crisis comprising a health shock, domestic economic disruptions, plummeting external demand, capital flow reversals, and a collapse in commodity prices. Risks of a worse outcome predominate.”

To reduce the scarring, the IMF recommends that governments help businesses, especially small and medium-sized ones, to prevent bankruptcies and smooth the path to recovery. Measures should include focused policies on tax reductions and wage subsidies, as many countries have been doing.

In Israel, the Finance Ministry has yet to present the particulars of its plan to increase employment through government grants of 6 billion shekels ($1.7 billion). Some have criticized the program as a surrender to pressure from the retail sector, but one economist, who asked to remain unnamed but is known as a critic of wasteful government spending, said he was supportive of the plan. If it can bring down the jobless rate to an acceptable level, 6 billion shekels will have been a bargain price to pay for that.

Most recessions originate in a drop in demand, but the coronavirus recession is unusual in that it has impacted supply first because of the lockdown.

“So far, we’ve been dealing with limitations on supply and at this stage of the crisis any effort to increase demand would have been useless, even harmful, said Prof. Rafi Melnick, an economist and provost at the Herzilya Interdisciplinary Center.

“Now that the economy is being re-opened, supply will increase, but the danger is that there won’t be any demand. Anyone who thinks that releasing the business sector [from the lockdown] would bring us to full employment is mistaken because consumer demand has evaporated,” he said, adding that business will refrain from investing for the near term, too.

Not all economists share Melnick’s concerns. The strength of consumer demand hinges on factors, such as how quickly workers return to their jobs, that are difficult to predict at this point. In addition, not all workers were equally affected by the crisis. For instance, an employee of a big, profitable insurance company that was put on unpaid leave is less likely to cut household spending than someone who works in the troubled airline industry.

In fact, Alex Zabezhinsky, chief economist of the investment house Meitav Dash, said he is more worried about the supply side. “Global produce has been entirely disrupted. It started with Chinese factories that were paralyzed and now it’s the rest of the world. That is likely to lead to shortages of some products,” he warned.

Zabezhinsky said he believes there is a lot of pent-up consumer demand waiting for businesses to re-open. Even though there are hundreds of thousands of Israelis getting by on unemployment benefits, “most employed people continue to work and most wage earners didn’t suffer a pay cut,” he said.

“At the same time, households reduced their expenses by about a third during the lockdown because people weren’t flying overseas, didn’t send their children to nursery school, didn’t eat out, get a haircut or have their cars repaired. Demand for all this will re-emerge gradually and it will be quite significant and help the return to normalcy,” predicted Zabezhinsky.

Gov’t to the rescue

Government measures are also expected to help demand – the extended period for unemployment benefits, for example, should serve as a signal to consumers that the state is there to support them. Likewise, the aid to the self-employed. In contrast, the 500-shekel grant given to parents and the elderly was useless as it was disbursed at a time when people were confined to their homes and could do little with it.

The exit from the crisis is seen by many as an opportunity to undertake structural reforms, some of which would help the government grapple with the growing budget deficit. On Wednesday, the treasury reported that the deficit had jumped to 4.8% of GDP in the 12 months through April, up from 3.7% in 2019.

Prof. Asher Blass, an economic adviser, has recommended a list of measures that are not specifically designed to address the coronavirus crisis but to accelerate economic growth in general.

One of the most prominent is to offer free pre-school from age two, which Blass said would not only add to economic output but would enable the government to partly eliminate tax benefits to parents of young children. He also urges the government to ban payments by parents for school enrichment programs.

Vis a vis the housing sector, Blass recommends ending the Machir L’Mishtaken (Buyer’s Price) program, which he says isn’t a cost-effective way to increase housing supply. He would reverse the higher taxes on property investors in order to encourage them to return to the market.

Blass also proposes to encourage capital investment through accelerated depreciation, as well as to amend the Law for Encouraging Capital Investment to support business sectors other than just industry.

Melnick has a single prescription for restoring economic growth: Massive government investment to make up for the expected decline in private sector investment.

The treasury has presented a program to spend 5 billion shekels, mainly on infrastructure, but Melnick said that is far from enough. Israeli government investment is equal to just 2% of GDP, far lower than the average of countries belonging to the Organization for Economic Cooperation and Development. If Israel spent a figure close to the average, investment would reach 15 billion annually. Melnick said now it should be even larger.

“We need to start this and not become alarmed by the [budget] deficit,” he said. “We don’t stop a cancer patient from getting chemotherapy, despite the serious side effects, if it’s the only way of saving the patient. The deficit is the solution, not the problem.”

Blass also supports stepped-up investment spending – on transportation and communications infrastructure and building hospitals. One economic policy official, who spoke on condition of anonymity, said infrastructure investment would not only give a boost to economic growth but also serve as a growth insurance policy in the event of a second pandemic wave.

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