Analysis |

Israel’s COVID Recovery Won't Offset Pandemic Losses

The forecast of 5% GDP growth in 2021 doesn't tell the full story, with the per capita figure significantly lower

Dafna Maor
Dafna Maor
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Jerusalem in 2021
Jerusalem in 2021 Credit: Emil Salman
Dafna Maor
Dafna Maor

Israel is proud of the pace of economic growth expected this year, which the International Monetary Fund estimates in its half-yearly forecast issued on Tuesday will reach 5%. That follows a 2.4% drop in 2020, a more modest decline than other developed economies suffered.

But the worldwide growth rate is forecast to be a higher 6% and that of the United States 6.4%. But even these numbers don’t tell the entire story because increases in gross domestic product don’t take into account population growth. Israel’s population grew quickly last year while several other large developed countries, the U.S. among them, experienced a sharp drop in population growth. Japan and South Korea even saw their populations shrink.

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So, when you measure economic growth in real terms and take into account the local currency, the IMF forecast looks very different. Israel’s GDP per capita at the end of 2021 will be 1.1% lower than it was two years earlier, on the eve of the coronavirus crisis. Growth in the year of recovery won’t be enough to offset the losses from the pandemic.

Israel, nevertheless, fares reasonably well among 37 peer countries, ranking 13th over the period of the coronavirus and the recovery. Among them, only nine countries will have larger per capita GDPs at the end of this year than they did at the end of 2019. They are countries that succeeded in overcoming the coronavirus well, such as Taiwan, Australia and South Korea. However, even countries that were hit hard by the pandemic, such as the U.S. and Ireland, will also show a net increase over the two years.

New Zealand’s performance is forecast to be weaker than Israel’s, with a net drop of 18% over the two years, but the reason for this is that the country’s big tourism industry closed up for business almost entirely.

Per capita GDP, which divides total GDP by population, isn’t a perfect tool for measuring the standard of living. Even so, it’s more precise than aggregate GDP for understanding the direction of the economy. Population growth automatically increases output, but if output grows more slowly than population, the economy has effectively performed more poorly.

In 2020, Israel was ranked 15th among 37 developed countries in GDP per capita, with a drop of 4.1%. In 2021, it will grow by 3.1%, ranking it 30th among the 37.

Switzerland will lead developed-country growth rates of 2020-2021, with 7.9%, according to the IMF. Behind it are Ireland, South Korea, Lithuania, Norway, the U.S., Australia, Latvia and Estonia. All of them will end the two years with higher per capita GDP than they started at.

Behind them are countries like Finland, Japan, Slovakia and Israel, which will end the period with a lower GDP per capita. At the bottom of the list are Spain and Italy, with per capita GDPs forecast to contract 5%. It’s interesting to note that Sweden is set to perform more poorly than neighboring Denmark, Finland and Norway, despite the government’s decision to keep the economy relatively open through the worst days of the pandemic. Sweden will end the two years down 2.5%.

The IMF’s forecast is more optimistic than previous ones due to the success most countries have had in getting their populations vaccinated. Nevertheless, Standard & Poor’s, the credit-ratings company, warned last month in a report that the recovery faces risks, some of which apply to Israel. It cited record-high levels of borrowing, including high-risk debt assumed by the corporate sector. Defaults could reach 5% to 6% a year.

Another risk, S&P says, is that the global post-COVID recovery will be uneven. Countries, those in the European Union in particular, haven’t succeeded in getting enough people inoculated. If there is something positive to point to, S&P noted that the number of credit-rating upgrades in recent weeks was higher than the number of downgrades. That’s the first time since December 2018 that the ratio was favorable. From S&P’s viewpoint, that marks a critical turning point.

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