Israeli economy's 2020 performance not what it seems

Queues outside supermarket  / Photo: Eyal Izhar, Globes

A decline of just 2.4% in GDP looks like success in dealing with the pandemic, but, as always, the devil is in the details.

On the face of it, the 2.4% decline in Israel's GDP in 2020 indicates that the Israeli economy coped better with the coronavirus pandemic than the economies of the US, Europe, Japan, and other places. Only some Asian countries did better than we did. That, however, is only how it looks at first glance. Looking at the numbers in a little more depth reveals almost the opposite picture. Israel's economic performance was one of the weakest among developed countries.

How does that add up? After all, numbers are numbers. The answer, as so often, is that the devil is in the details.

The relatively small decline in Israel's GDP stems from one thing only: exports. For most countries, exports fell last year, even steeply. In Israel, exports grew, only by 0.6%, but still, that bucks the global trend.

How did Israel's exports succeed in growing with the world in deep crisis?

The answer is that they didn't really succeed all that well. Exports of services from Israel fell by 2.7% despite the handsome growth of services exports by technology companies. The growth was actually in goods, by 5.2%. For the sake of comparison, exports of goods rose by 0.7% in 2019, by 2.1% in 2018, and in 2017, they fell, by 0.2%.

How could it be that in a global crisis year, exports of goods from Israel not only rose, but beat the growth rates of previous years?

Part of the answer lies in diamonds exports, which grew by an exceptional 21.7%, but part lies in a few isolated deals by large companies of which the Central Bureau of Statistics has not provided details. Most Israeli exporters were dealt a severe blow last year, just like their overseas competitors. The rise in exports that save Israel's GDP in general is something that has little to do with the economy as a whole and is not characteristic of it.

What does characterize the economy is private consumption. It relates to all households in Israel and is affected by the economic situation in the country, by the labor market, by wage levels, by people's feelings about their economic situation and that of the country in general.

In this respect, Israel's numbers do not look good at all. Private consumption here fell in 2020 by 9.4%, which is much more than the declines of 3.9% in the US, 4.9% in South Korea, and 6.4% in Japan. Even in France, which suffered greatly from the pandemic and from lockdowns, the decline in private consumption was smaller, at 7.1%. Only in the UK was the damage greater than in Israel.

Why did private consumption fall so much in Israel? It's hard to know exactly. It may be that there were more lockdown days in Israel. Perhaps the incentives supporting consumption were weak in comparison with those in other countries. We only know that the decline in the index of consumer sentiment in Israel in comparison with its level before the pandemic broke out was one of the largest among the OECD member countries. We also know that the fall in employment in Israel last year was almost the steepest in the OECD, which could certainly have affected private consumption.

In principle, Israel's basic conditions should have given it an advantage in dealing with the pandemic. Incoming tourism affects our economy far less than it does most developed economies, certainly those in Europe. The weight of the commerce, transport, food and hospitality sectors, which were very hard hit by the pandemic, is lower in the Israeli economy than in the US or Europe. These advantages were not manifest, however, in the end results.

It can only be hoped that the Israeli economy will be able to leverage the success of the country's vaccination campaign as it exits the crisis. Against that, we have an election and we have no state budget. A budget could have done a great deal to extricate the economy from the crisis.

The writer is the chief economist of Meitav-Dash Investments Ltd.

Queues outside supermarket  / Photo: Eyal Izhar, Globes
Queues outside supermarket / Photo: Eyal Izhar, Globes
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