Analysis |

The Coronavirus Crisis Has Set Israel’s Economy Back Four Years

Everything has collapsed – except government spending – and political instability amid a renewed outbreak means the situation could get worse

Sami Peretz
Sami Peretz
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Empty stores for rent on Ben Yehuda Street in Tel Aviv, July 13, 2020
Empty stores for rent on Ben Yehuda Street in Tel Aviv, July 13, 2020Credit: Eyal Toueg
Sami Peretz
Sami Peretz

The steep rise in COVID-19 infections in the past few weeks has put the idea of imposing another lockdown back on the government’s agenda – to lower the number of those diagnosed with the coronavirus back to only a few hundred per day – but Prime Minister Benjamin Netanyahu is still hesitating.

He has a great number of reasons to hesitate, and one of them is the terrifying economic data, the likes of which we have never seen in Israel, which were released on Sunday by the Central Bureau of Statistics. During April the number of employees allowed in workplaces was limited to 10, or a maximum of 30%, and the aviation, tourism, entertainment and recreation industries were shut down – along with the entire educational system. As a result, the economy shrank by 8.1% in the second quarter, a plunge of 28.7% on an annualized basis.

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This contraction set the gross domestic product back four years, to the level of the fourth quarter of 2016. This drop was seen in all sectors, except for government spending, which skyrocketed to pay for spending on health, unemployment and grants to businesses. The rest of the sectors showed a steep drop: Private consumption plummeted by 13.3% in the quarter and by 43.4% on an annualized basis, as did investment, imports and exports.

On Sunday, Netanyahu hurried to explain that this was an achievement because other economies such as Britain, France, Spain and Italy suffered even higher declines. But this is a poor consolation. The main difference between them is the timing of the end of the lockdown, and these are countries that suffered much worse from the virus – it is logical that they will pay a higher economic price. Besides, the crisis is still going strong, and to determine who was hit harder and who less so, we will need to wait for its end.

Two things will determine the eventual economic toll: Theharshness of the lockdown – and it is possible we will see another one here soon – and the economic incentives and reforms each country implemented.

A restaurant that closed in Tel Aviv due to the coronavirus crisis, July 2020Credit: Meged Gozani

The Israeli government has come under a great deal of criticism regarding the effectiveness of the incentives used during the crisis. For example, the furlough arrangements may have provided workers with a certain amount of financial security during their months of unemployment, but it also encouraged employers to furlough workers and caused a steep rise in unemployment to a record high of 27.8% in April. Since then, joblessness is coming down, but at too slow a pace. One of the reasons for this is that the government dragged its feet in encouraging employers to bring back furloughed workers. A 6 billon shekel scheme was allocated to encourage employers to hire, but the officials involved found it difficult to reach a decision on the right mechanism for parceling out grants.

Each delay in the economic plans at the height of such a severe crisis exacts a heavy price, as some businesses are forced to close. According to figures from the Israeli Employment Service, 878,000 people are unemployed and looking for work at the moment, which translates to a 21.5% unemployment rate. For the Central Bureau of Statistics, the unemployment rate is only 12.3%.

Regardless of whose data is correct, Netanyahu has nothing to be proud of, because it remains one of the highest in the world. The government will have to promote plans to strengthen the economy and businesses. But some of these government plans are controversial – for example, the decision to make a 750 shekel payment to adults, and 500 shekels for each child, which was intended to encourage private consumption.

Netanyahu was presented with data from studies that show that one-time grants do not increase consumption, but only lead to an increase in disposable income. Netanyahu did not listen to this criticism, because he preferred a simple and fast mechanism to transfer money into people’s bank accounts, and as a way to influence public opinion in his favor while he considers holding elections in November. Here too, Netanyahu was presented with more effective ideas, such as distributing vouchers that can be used for restaurants, entertainment and recreation, and other businesses that have been directly affected by the crisis. Focusing on helping businesses that have suffered from the crisis increases the chances that they will employ people and will help reduce unemployment – as opposed to the supermarket chains that flourished during the crisis and do not need any government incentives.

The depressing data has one advantage at this time: It puts public fears about the economic crisis at the forefront of Netanyahu’s considerations, along the large number of polls he conducts, especially on the question of whether to call an election. The dispute with Kahol Lavan over the budget may be close to a temporary solution, but the horizon this government is looking at is very short because of Netanyahu’s legal situation.

Political stability is a necessary condition for making high quality decisions – along with harsh economic decrees – in both the short and long-term. Without it, the exit from this severe recession will be very slow, and it could cost many more billions of shekels wasted on ineffective incentives. This could even make the figures from the second quarter of 2020 look better than those of the quarters that follow it.

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