The coronavirus pandemic presents the economy with two main challenges: getting control of the monstrous fiscal deficit, and returning unemployment from a double digit rate to reasonable proportions. This is the message of the annual report of the Bank of Israel for 2020, which Governor of the Bank of Israel Amir Yaron presented to President Reuven Rivlin today. The report comments on the measures introduced by the government and the central bank, the one in order to curtail the pandemic and the other in order maintain financial stability.
The crisis caught Israel is a good economic position but the damage was severe, although less than expected. GDP shrank by 2.5% as private consumption fell 9.5%, largely because of enforced social distancing. On the other hand, the rate of private saving reached record levels, as did the current account surplus, thanks to exports led by the technology sector that mitigated the effect on GDP.
Inflation was negative in 2020, at minus 0.7%. The effect of the pandemic on economic activity and on fuel prices, and the appreciation of the shekel, both contributed to this. But what mainly concerns Yaron is the labor market, which sustained "a sharper blow than GDP." The average broad unemployment rate for the year rose to 15.7%, with low-paid workers being the worst affected. This artificially raised the average wage.
Yaron: Approving the 2021 state budget is a vital step
At the beginning of the crisis, Governor of the Bank of Israel Yaron, who acted forcefully to stabilize the financial market, spent a considerable amount of time in meetings with the Ministry of Finance and the government. But as time went on, the government's decisions seemed to become more and more populist, and Yaron's advice seemed to be cast aside.
In the chapter of the report on fiscal policy, in which transfer payments made to assist households and companies were the main cause of the rise in the fiscal deficit to 11.6% of GDP and to the growth in the debt:GDP ratio from 60% on the eve of the pandemic to 72.6% by the end of the year, the Bank of Israel finds that fiscal policy will have to be adjusted in order to ensure a fall in the public debt:GDP ratio.
"To achieve that, the phasing out of the special expenditure connected to the crisis will not be enough," Yaron said, as the large and widening structural deficit before the crisis necessitates additional adjustments. The government, however, needs to conduct itself within orderly frameworks and in accordance with long-term fiscal rules in order to preserve the credibility of fiscal policy - something that is difficult, if not impossible, in the current political situation. "Approval of the state budget for 2021 is a vital step in this context," Yaron said.
The sub-prime crisis versus the Covid-19 crisis
The Israeli economy entered the Covid-19 crisis is a pretty good state, but the cumulative damage of the crisis, up to the time of the writing of the report, is estimated at 5% of GDP. The Bank of Israel writes that this is four times the damage from the entire sub-prime crisis of 2008, and is similar to the cumulative damage during the two years following the dot.com crash (2001-2003).
Nevertheless, the Bank of Israel states that it is too early to make a comparison between the total damage done by Covid-19 and that of the dot.com crash (12% of GDP). The previous crises were mainly on the demand side, whereas the Covid-19 crisis combined the supply and the demand side because of the restrictions imposed by the government. Unlike in the dot.com crash, when the technology sector made the damage worse because of its high proportion of the economy as a whole, in the Covid-19 crisis the export performance of Israel's technology sector stood out for the good.
Published by Globes, Israel business news - en.globes.co.il - on April 6, 2021
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