Just days before the election, the economy is shining brightly for Prime Minister Benjamin Netanyahu.
Albert Bourla, the CEO of Pfizer, said in an interview with Channel 12 television that Netanyahu’s constant badgering, including scores of calls in the middle of the night, was the main reason his company sold Israel millions of its COVID-19 vaccine. That, and the efficient management by Israel’s health maintenance organizations, made the vaccination program such a success.
The data emerging on the economy is surprising everyone and looking much better than the most pessimistic forecasts foretold.
At the start of the pandemic, the treasury was sure the GDP would contract no less than 5% in 2020. The International Monetary Fund saw an ever more bearish 7% drop. Towards the end of the year, the treasury revised its estimate to a 3.5% decline, but even that proved to be too pessimistic and the preliminary figure by the Central Bureau of Statistics shows a 2.4% decline, among the smallest in the developed world.
For this year, Finance Ministry Chief Economist Shira Greenberg is radiating optimism. Last week, she forecast economic growth would reach 4.9% this year and 4.1% in 2022.
On the surface, the data shows the Israeli economy recovering from the coronavirus with nary a scratch. The giant budget deficit of 12%, the ballooning debt-to-GDP ratio and the double-digit jobless rate will be history by the end of the year.
The coronavirus crisis is now entering the annals of Israeli history as yet another crisis the economy weathered easily. Israel is an experienced crisis expert: It gets into messes often unnecessarily, but through pluck and luck it exits them successfully.
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The 2008 financial crisis passed Israel by with barely a dent. The Second Lebanon War, which marked the first time that large parts of Israel came under missile attack, similarly had no impact over the medium term. Each of these events saw Israel emerge stronger, with a lower debt ratio and a bigger current account surplus. Has it happened again with COVID?
The answer is complicated and depends a lot on who is asking the question. First, economists are divided about whether Israel coped so successfully. Yes, GDP fell a relatively modest amount but Israel’s population growth is relatively high, which automatically boosts our GDP growth. The real test of success is per capita GDP growth and by that measure Israel’s performance is average, notes Prof. Zvi Eckstein, dean of the Tiomkin School of Economics at the Interdisciplinary Center, Herzliya.
Secondly, Israel was fortunate to have an economy built to withstand the pandemic better than most. Tourism, which was hit hard, accounts for only 2% of GDP while high-tech, which is much more important, was barely touched. It even thrived during the pandemic and was the biggest factor in Israel’s success.
Third, Israel has demonstrated surprising reliance in the face of crisis. Not just the global financial crisis and Second Lebanon War, but the successive wars with Hamas in Gaza. Israeli are tough in times of trouble.
Eckstein talks of four pillars to Israel’s ability to withstand crises: a stable banking system, low debt, big current account surpluses and an excellent central bank. There’s a fifth pillar, which is a flexible labor market that moves quickly to lay off workers and cut pay, enabling businesses to survive. Of course, this doesn’t apply to the public sector.
These five pillars don’t always work, as the deep recession that came with the second intifada showed. Back then, Israel was hit by a combination of deadly violence and the bursting of the dot.com bubble, and the country had to resort to unusual measures to recover.
Fourth, it is too early for Israel to declare victory over COVID. Like with the second intifada, Israel suffered a double whammy in the form of simultaneous political and health crises. Israel didn’t get control over its morbidity rate, which was one of the highest in the world, and was one of the world’s few countries to initiate three lockdowns. On the other hand, we did vaccinate ourselves quickly, enabling us to exit the crisis earlier than most of the world.
Side by side with all the positive economic data, economists point to others which show that all our problems aren’t behind us. Michael Sarel, a former treasury chief economist, notes figures published last week that show household income grew in 2020.
The plus side of the grants was that incomes were preserved and that consumers are better positioned for the recovery. The minus side is that the grants were a kind of artificial respiration that kept businesses alive that should have died – and will collapse once the money runs out.
The other worrying data points are Israel’s increased debt and unemployment rate, which are among the highest in the world. The real rate will only emerge once jobless benefits for people on unpaid leave expire. As to the debt, says Sarel, the cost will be with us for years to come.