OECD Economic Outlook, Volume 2020 Issue 2

Israel

After a decline of around 4¼ per cent in 2020, GDP is projected to grow by around 2¼ per cent in 2021 and 4¼ per cent in 2022. Increased unemployment, and the likely rise in insolvencies after the second national lockdown, will weigh on the recovery of consumption and investment, despite government support to households and firms. From the second half of 2021, domestic and external demand will gain some strength as an effective immunisation against the virus is implemented. Unemployment will decline slowly but remain above pre-crisis levels at the end of 2022.

Macroeconomic policy should remain supportive and adapt to changing circumstances. The prolongation of some exceptional support measures until mid-2021 is welcome, but should be accompanied by more training and job-search assistance to help the unemployed transition to new jobs. Boosting investment in infrastructure and pre-school education can strengthen the recovery and help reduce socio-economic disparities.

The economy is gradually reopening after a second national lockdown

Amid rapidly increasing infection rates in the summer, the government re-tightened several containment measures in July and eventually introduced a second national lockdown from mid-September to mid‑October over the Jewish holiday period. As the number of new cases has fallen, a gradual re‑opening of the economy has begun. Movement restrictions have been lifted, and pre‑schools, lower school grades, retail street shops and businesses that do not receive customers have been allowed to reopen except in localities with high infection rates.

Israel: Consumption and labour market

1. Series includes persons not in the labour force who stopped working due to dismissal or closure of the workplace since March. Data not available before March 2020.

2. This includes employees on unpaid leave, employees who were absent during the week due to reduced workload, work stoppage or other reasons related to the pandemic and excludes quarantined persons.

Source: Bank of Israel; and Israel Central Bureau of Statistics.

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Israel: Demand, output and prices

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Economic activity is subdued

The economy rebounded strongly in the third quarter of 2020, driven by private consumption and exports. High frequency mobility and credit card purchase data suggest a sharp drop in activity during the second lockdown albeit to a lesser extent than in the first lockdown. Consumer and business confidence also weakened again in October. The broadly‑defined unemployment rate, which includes temporarily laid-off workers and people who left the labour force due to the pandemic, increased markedly again to around 20% in October. Consumer price inflation remains negative.

Fiscal and monetary support has been substantial

The monetary and fiscal authorities have taken extensive measures to support the most vulnerable households and firms. The central bank broadened its asset purchase programme to include corporate bonds in July, and expanded in October its government bond purchase programme by NIS 35 billion to NIS 85 billion (6% of GDP) and its credit facility for SMEs via banks. Approved discretionary fiscal measures amount to around 7% of GDP in 2020, including broadened eligibility to unemployment benefits for workers on unpaid leave. By end-October, about 65% of the spending had been implemented. To cushion the shock of the second lockdown, eligibility conditions for firm support have been temporarily eased further, and subsidies have been made available for firms to retain workers. A budget for 2021 has not yet been submitted, but several emergency measures, such as grants to hard-hit businesses and expanded eligibility to unemployment benefits, have been extended until June 2021, contingent on the economic situation. An additional NIS 5 billion (0.3% of GDP) has been allocated to public investment projects over the period 2020-25.

The recovery from the pandemic will be slow

The projections assume a more gradual exit from the second lockdown compared to the first one. GDP will recover only modestly by 2.3% in 2021 before expanding by 4.2% in 2022 as an effective vaccine is rolled out. High uncertainty, increasing unemployment in the near term, and a likely rise in insolvencies once government support is withdrawn will weigh on consumer demand and investment. Demand from Israel’s main trading partners will only pick up gradually. Unemployment will start to fall slowly in 2021 but remain above pre-crisis levels at the end of 2022. The fiscal projections include the announced extension of several measures for next year, but assume overall lower fiscal support compared to 2020 as other emergency measures are phased out. A deterioration of the health situation requiring new nationwide lockdowns would delay the recovery further until immunisation becomes general. Growth could also be weaker in the event of heightened geopolitical tensions or renewed internal political uncertainty. Growth could be stronger if the government approves more substantial fiscal support than assumed.

Policy should support the recovery

Fiscal and monetary policy should remain supportive in the near term. Approving a budget for 2021 as soon as possible would reduce uncertainty and improve fiscal transparency. As the recovery progresses, it will be important to shift policy from broad income and liquidity support to more targeted measures that facilitate the reallocation of capital and workers from sectors facing extended lower demand to expanding sectors. In this respect, Israel has scope to step up active labour market policies, such as retraining and job-search support, to help the unemployed transition to new jobs. As some emergency measures are phased out, there is also an opportunity to channel funds into areas that help boost demand in the short term, improve productivity and narrow Israel’s socio-economic gaps. Further infrastructure investment is needed, as well as additional funding to build new childcare capacity and to improve its quality, particularly in lagging regions. Strengthening existing in-work benefits would support the households most in need and improve work incentives for low-skilled workers.