Opinion |

Israel's Economy Gets a Reality Check – and Passes the Test

The economy is shrinking but not much by global standards. Factoring in the growing black market, the situation may be better still

David Rosenberg
David Rosenberg
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Making face masks in Israel, Sderot industrial zone
Making face masks in Israel, Sderot industrial zoneCredit: Eyal Toueg
David Rosenberg
David Rosenberg

Reality checks are those critical moments when you remind yourself of the real state of the world. Since that’s usually dismal, the reality you find is almost always worse than you thought.

However, the reality check of the Israeli economy shows the opposite: things aren’t as bad as we thought even though the coronavirus is still raging.

The first reality check was when Standard & Poors affirmed the State of Israel's credit rating. In the run-up, everyone was talking about a credit downgrade or at least a Negative outlook, even though Moody’s a few weeks earlier did nothing of the sort. The assumption was that S&P would be appalled by the coalition infighting, the fiscal chaos, the exodus of top treasury officials and Israel’s failure to contain the pandemic.

S&P and Moody’s didn’t ignore any of that, but they focused on obscure but critical parameters that are routinely ignored by the media.

Here are just two of them. Israel’s public debt is rising rapidly, but unlike many countries, we have a relatively high rate of domestic savings and 85% of the country’s debt is domestic, i.e., we owe the money to ourselves.

Another is that Israel has been running current account surpluses for almost two decades. The result is not only huge foreign reserves but net external assets equal to 45% of GDP, i.e., Israelis own far more assets abroad than foreigners own here.

All of that creates a nice cushion for Israel to get through the crisis and get its political house in order.

The second reality check was provided by the Central Bureau of Statistics report on third-quarter national accounts. The headline figure showing a 37.9% annualized increase in GDP from the second quarter wasn’t the reality check part. That just reflected a powerful rebound from a near 30% drop in April-June when the economy was paralyzed by the first nationwide lockdown.

View of the Rosh Ha'Ayin industrial zoneCredit: Ofer Vaknin

The more relevant figure was the 1.4% year-on-year decline in GDP, the second-smallest drop among developed economies.

The U.S. economy shrunk by 2.9% and Germany’s by 4.2%. Others showed even steeper declines, even though Israel’s third quarter was weighed down by its entering a second lockdown in the final two weeks of the period. Europe’s second lockdown is only starting now.

A third reality check came from the statistics bureau’s unemployment survey for the second half of October, when the second lockdown was winding down. Its broad measure of unemployment in the second lockdown never exceeded 22.7%, less than the 26.6% peak during the first lockdown. If the experience of the first lockdown holds for the second, it will drop rapidly in the weeks ahead (it fell to 18% in the second half of October) even though many businesses remain shuttered.

The vast majority of jobless in Israel, taking the broad definition, are on unpaid leave, meaning their employers expect to take them back. If you count just those who were fired or quit their job and are actively looking for a new one (the traditional unemployment measure), the unemployment rate was just 4.8% in late October, which is not high by historic standards.

Legal but shady

None of this is any reason to party, which in any case you can’t do because gatherings of more than 20 people are banned. The Israeli economy is smaller than it was before the coronavirus and even if growth resumes next year, current forecasts don’t see it reaching its pre-pandemic levels until maybe 2022.

How come we’re not doing as badly as we think? One place that can't take credit is the government, apart from the Bank of Israel, which has done its duty keeping the financial sector afloat. As for the rest, starting with our hapless finance minister, Yisrael Katz, the public’s lack of confidence in their leaders is entirely justified. Economic policy, such as it has become, rests on two pillars – throwing money around and serving the prime minister’s political agenda.

What’s saving us from the worst is that we have a big high-tech sector, which isn’t feeling much of the impact of the pandemic and in some cases is even thriving. We also have a profitable and well-capitalized banking sector and a high-profile but relatively small tourism industry.

Strangely enough, another asset Israel brings to the pandemic table is a big black market, or to be fairer, shadow economy, since most of the activity is legal but not reported to the tax authorities. Estimated at 22% of GDP before the pandemic, that figure has almost certainly grown this year as more businesses violate lockdown rules and more people work off the books so they can keep collecting unemployment.

According to a statistics bureau survey this week, many Israelis not only fear for their finances but are more stressed and even depressed. That’s understandable at a time when people are at home, isolated with kids underfoot and no sense of when it will all end. This week’s reality check should provide a little cheer.

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