"Israel is just at the start of the economic effects"

Leo Leiderman / Photo: Eyal Izhar, Globes

Speaking at the Globes "Business, Economy and Law in the Shadow of Coronavirus" conference, Bank Hapoalim chief economist Leo Leiderman said the medical crisis must not become a financial crisis.

Professor Leo Leiderman, chief economist at Bank Hapoalim, believes that we are only at the beginning of the effects of the coronavirus crisis on the economy. Leiderman was speaking at the "Business, Economy and Law in the Shadow of the Coronavirus" conference held by "Globes". The conference is taking place without an audience, and is being broadcast live.

"If we do a zoom-in on the Israeli economy, we see that some sectors are very vulnerable. Efforts are therefore being made to solve this problem, because if workers in these sectors cannot enter the country, such as in real estate, there will be delays in handovers of housing units. Some infrastructure projects also depend on foreign workers, mainly from China. The countries that are main candidates for economic recession are in Europe, while China looks at the moment as if it is on a slight recovery trend."

What about the financial system

"What started as a health problem has overflowed all the lockdowns and isolation to become a problem in the real economy, and of course there are real fears about the financial system. In that respect, the vital thing for central banks and governments is to take steps to ensure the stability of the financial system. This is what was done in the crisis of 2008, and what was not done in the crisis of 1929 in the US. The entire financial system depends on liquidity. Liquidity is the keyword, and the last thing we want to see in the world now is a liquidity crisis and a financial crisis."

What are the prospects for growth in the Israeli economy?

"I don’t recommend working according a specific scenario, because things are changeable. In Israel, we see the second and third quarters as very significant. The first quarter figures are unimportant, you can forget them. We know that the Israeli economy goes into this crisis in a relatively good state, but the second and third quarters look tough and we think that there's a chance that GDP may be at a standstill or even fall. What is certain is that there will be a fall in GDP per capita. If we manage to gain control over the development of the disease, then the hope is that we will see recovery in the final quarter of the year. But it should be very much stressed - everything depends on the medical situation, and the medical situation requires closure of the territories, isolation and paralysis of whole systems, and in the short term these things affect the economy."

We haven't seen anything like this in Israel before.

"I agree with you. In Israel, we are only at the beginning of the process, of the real effects on the economy. The measures recently announced, including the decision last night to ban gatherings of more than 100 people, are certainly things that change the background music.

"I think the first thing to do is to ask the scientific and medical experts, and we have talked to them a great deal. They can't give a credible forecast that on June 30 the curtain will come down and suddenly the coronavirus crisis will be over, and everything recovers on July 1. Most of the medical people think that it will be an ongoing phenomenon that will carry on for the whole year, and that there is a risk that next winter, in November, the same kinds of problems will arise again."

Which sectors appear to be most vulnerable?

"When we talk about recession it's very important to talk at the sectoral level, and about the paralysis in aviation, tourism, and some prominent areas of international trade, to which must be added something that we don't have many figures onin real time, which is small and medium-size businesses. The construction industry is dependent on workers coming in from the West Bank, and at present they are not coming in."

So what can be done - by central banks, for example?

"The steps to be taken by central banks are just about written down in the textbooks on previous crises - to ensure that there is enough oxygen and liquidity in the system, so that what started as a medical crisis does not spill over into the financial system. In the US, there is a real problem with the bonds of oil companies working with new shale oil technologies, and the decline in the world oil price is a threat to their very existence. These companies depend on raising money and recycling debt, and that is something that the central bank in the US will have to focus on, whether it provides a safety net or employs some other means. There is also the problem of small businesses, and that requires cooperation between the central bank and the Ministry of Finance, because there are taxation and other aspects, but liquidity and financial stability are the order of the day. And I have to say that when I watched US President Donald Trump's speech yesterday, these matters hardly featured. I expect that they will make an appearance today or tomorrow."

During the election campaign there was much talk of the fiscal deficit. Should we be concerned about the deficit at times like these?

"We should always be concerned about a deficit because there are no free lunches. And if this generation doesn't take care of it, then the next generation will have to finance the debt, and that will mean new taxes. We think that the current situation is an economic emergency, and in an economic emergency it's permissible to take steps that will substantially enlarge the deficit, as long as they are reasonable, well-judged steps.

"The health system requires and will require substantial improvements and changes. On the social level, people may be laid off, and it will be necessary to ensure that they have the wherewithal to live. There is the whole area of welfare, and small and medium-size businesses. In other words, there's a broad spectrum, but first and foremost is health, because the problem that brought us to this position is a health problem."

How should company managements and boards of directors be dealing with the situation?

"We recommend managements and boards to work according to scenarios. Not to be locked onto a single scenario that says 'OK, we know that this crisis will end in June or in September.' There's what I would call the optimistic or moderate scenario, in which the second and third quarters will be hard, but then there will be some kind of gradual take-off. You have to remember that as soon as it's a matter of a crisis in the real economy, much as recovery will be very welcome when it happens, it will be gradual, in contrast to the financial sector, where as soon as the medical situation stabilizes the extent of the rises will match the extent of the falls.

"The former optimistic scenario no longer exists. The optimists said that the problem belonged to China, and that it would be confined to the first quarter of this year. The pessimistic scenario is of a recession lasting the whole year, with all that that implies, and then to hope that starting conditions in 2021 will be better."  

Published by Globes, Israel business news - en.globes.co.il - on March 12, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

Leo Leiderman / Photo: Eyal Izhar, Globes
Leo Leiderman / Photo: Eyal Izhar, Globes
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