Economic trends
The COVID-19 pandemic has struck the global economy with unprecedented intensity and speed. The health crisis has led to significant disease-prevention measures, which have directly affected economic activity but with differential impacts across the various sectors of the economy.
According to the Israeli Central Bureau of Statistics, the national shutdowns which were imposed during March-April meant that Israeli GDP contracted by around 1.7% during Q1 2020 with a further decline of over 8.1% during Q2, leaving the economy around 10% below its size at the start of the year. The recovery which began in April/May continued into the third quarter, with credit card and VAT data providing encouraging signs of improvement.
In order to reduce the duration and intensity of the economic crisis, Israel is expected to follow other major economies in utilizing extensive fiscal policy measures and a significant increase in government spending to protect businesses and stimulate growth. Monetary policy is also expected to be accommodative. Inflation was already subdued prior to the crisis and is now expected to remain below 1% at least through to the end of 2021. Falls in oil and other commodity prices coupled with rising unemployment (particularly in the tourism sector) mean that inflationary pressures are largely absent, despite the recent devaluation of the given that exchange rates are now expected to stabilize.
As elsewhere, interest rates are expected to remain close to zero for an extended period with the Bank of Israel projecting policy rates of 0-0.25% by the end of 2021. It is noteworthy that in addition to interest rate controls, the Bank of Israel operates additional policy tools to address the liquidity needs of the economy and to moderate the rise in yields in the credit market, both in local currency and in foreign currency.
In this "downside scenario", the impact on potential economic growth will be prolonged and the recovery rate slower – resembling the effects of the Financial Crisis in the early 2000s.
Economic outlook
Even if it is relatively rapid compared to other crises, the recovery is likely to be gradual; many impacts of the pandemic will persist through 2021 and some are likely to be permanent. The precise trajectory depends, of course, on the path of the pandemic.
The “gradual recovery” scenario assumes that the recent rate of economic expansion will slow as a “second wave” of infections results in further government restrictions, though not as severe as earlier in the year. In this scenario, GDP is expected to shrink by 5.1% in 2020 and grow by 5.4% in 2021 according to the Israeli ministry of finance.
However, there is a “downside scenario” under which the second wave of infections leads to full statewide closure. In this scenario, the impact on potential economic growth will be prolonged and the recovery rate slower – resembling the effects of the Financial Crisis in the early 2000s. In this scenario, GDP is expected to shrink by 7.2% in 2020 and grow by just 2.3% in 2021.
The crisis has clear labor market implications which have direct and indirect impacts on the real estate market which we explore further in this report. In comparison to 3.9% on 2019, unemployment rose to 6% in August 2020. In addition, when including COVID-related absentees and business closures it rose to 12%, twice as much. The rate was expected to have declined to around 8% by the end 2020, however due to the “second wave” hit of more quarantines and worsening regulations, Unemployment rose to a whopping 22.7%1 as of November 2020.
Footnotes
1. Israeli Central Bureau of Statistics
