Analysis |

Israel’s Economy Has Survived the Resurgent Coronavirus, for Now

The recovery from the first lockdown was impressive. But the second lockdown and the growing political chaos could deal a fatal blow this time

Meirav Arlosoroff
Meirav Arlosoroff
Netanyahu attends a briefing on the coronavirus at his office in Jerusalem, September 13, 2020.
Netanyahu attends a briefing on the coronavirus at his office in Jerusalem, September 13, 2020.Credit: POOL/ REUTERS
Meirav Arlosoroff
Meirav Arlosoroff

Prime Minister Benjamin Netanyahu addressed the nation Sunday night after the cabinet approved a nationwide lockdown starting Friday and, as is his wont, failed to tell the truth. He bragged that Israel was among the countries least affected by the coronavirus pandemic, economically and in terms of public health, because mortality rates have been so low.

In a departure from custom, Netanyahu did not present a graph to demonstrate this, and not chance. Israel’s death rate from COVID-19 is currently 120 people per million population, above the world average. It is much higher than Germany’s or Austria’s, even though Israel has a younger population that makes it more resistant to the virus’ worst effects.

The reality is that Israel is a global failure in handling the coronavirus. We are at present the only country in the world that has called a second nationwide lockdown. Netanyahu is well aware that his policies are responsible for this situation, but that hasn’t stopped him from lying without a moment’s hesitation.

Netanyahu did tell the truth in one respect, however. In terms of the economy, the situation is acceptable. The hit the country has taken on gross domestic product per capita is smaller than in most other countries, and the economic recovery from the first lockdown was quite impressive. There are several reasons for this.

The first is simple luck. The structure of the Israeli economy made it less vulnerable to the pandemic than many other countries. We have a lot of high-tech, while tourism is a relatively small component of GDP. Israel didn’t suffer the same as, say, Greece did when international travel shut down.

Quite the contrary, the pandemic even helped some sectors. Israel exports more tourists than it imports (that is, more Israelis travel abroad than foreigners come to Israel). As a result, 1 million Israelis who would have flown abroad this summer stayed home and patronized hotels, restaurants and attractions and shopped locally.

The second is our long experience in coping with crises and knowing how to bounce back from them. This was evidenced in the recovery of state tax revenues, which were higher in August 2020 than they were in August 2019.

Jobs recovery

It also showed up in the improving employment statistics: Some one million Israelis who had been placed on unpaid leave at the beginning of the crisis have gone back to work. The broad unemployment measure had dropped to just 9.8% in August.

The third factor was the rapid reopening of the economy following the first lockdown, in March and April. Netanyahu is proud of that return to near-normalcy and justifiably credits himself and the government for that. Unfortunately, it was the rapid return – unrestrained and unplanned – that enables the coronavirus to return, big-time, in short order.

The price the Israeli economy will pay for that begins Friday with the second lockdown, one that will probably last for a month and will cause considerable economic pain. The fun that the prime minister urged Israelis to have in May, when the first lockdown was lifted, is leaving us with a hangover as the second lockdown starts.

There is a lot of fear and uncertainty regarding how the second lockdown will play out economically. On the one hand, we’ve seen that the economy can weather a lockdown relatively well and that most businesses can recover. On the other hand, the Israeli economy enters the second lockdown already battered by the first. Many sectors of the economy remained fully or partially shuttered after the first lockdown. They will have a hard time surviving the second one.

The fact that the new lockdown comes at a time of recovery is very disappointing for the simple reason that it may nip the recovery in the bud. Furthermore, the sense that the government has lost control has undermined the public’s confidence. The pandemic has exposed Israel as a country that is the most divided and mismanaged in the developed world. How will that affect people’s willingness to start businesses and to invest?

Israel’s global image will almost certainly be affected by its failure, which may eventually manifest itself in lower international credit ratings and maybe even a financial crisis. This fear is being magnified by the endless political crises and Netanyahu’s seeming determination to call a fourth election. It’s not the kind of environment that foreign investors like.

The fourth reason for Israel’s recovery is the policies that were undertaken by the government to keep the economy’s head above water. During the first lockdown, the Finance Ministry came under attack for its hesitation, stinginess and lack of a clear policy to support business.

In retrospect, some conclusions can now be drawn. It’s true that support for business was minimal. But surprisingly, the rate of business failures, as presented by Finance Ministry Director General Keren Eyal Terner, has been one-third less this year than in 2019. It seems that the government was keeping alive businesses that in normal times would have shut their doors.

Second lockdown built in

It should be remembered that the aid programs the treasury designed assumed that there might be a second lockdown, and it was aimed at businesses that sustained the hardest blow, namely those whose turnover declined by 40% or more from the same period last year. That meant that only the most deserving businesses received help. This time around the benchmark is only a 25% decline. It seems the principle has been weakened.

Another lesson that can be learned is that the policy of unpaid leave during the first lockdown proved itself. Businesses that needed help retaining employees as well as workers who were furloughed all received immediate assistance. The policy of unpaid leave will remain the leading policy tool in the second lockdown, too.

Estimates are that between 300,000 and 600,000 workers will join the roles of the unpaid. The Bank of Israel and the Finance Ministry are exploring ways of reducing that number a little, for instance by awarding grants to employers who retain workers on a sliding scale that encourages them to keep more workers n the payroll.

But in the end, unpaid leave has a critical advantage in its flexibility – it allows businesses to reduce costs quickly and to take employees back quickly, too.

The government came under attack for or not being generous enough in contending with the pandemic, but the criticism doesn’t stand up to the facts: Israel’s aid package wasn’t appreciably less than what was being offered around the world.

The criticism also doesn’t stand the test of principle: A global competition over who can spend the most is wrongheaded, especially for Israel to join in. Israel was already running a big fiscal deficit, it has no budget for 2020, its government is unstable and its lost control of the pandemic.

Under the circumstances, the government was right to save its fiscal ammunition in the first lockdown for the second, or maybe a third. Better safe than sorry.

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