Economy to shrink, deficit to surge as virus runs amok, top economist says

Deputy chief economist at the Finance Ministry says economy will post negative growth of 2% this year; good news is, when recovery comes, it will probably be fast

Shoshanna Solomon is The Times of Israel's Startups and Business reporter

An illustrative image of how the coronavirus is affecting economies and stock markets globally (Dina Damotseva; iStock by Getty Images)
An illustrative image of how the coronavirus is affecting economies and stock markets globally (Dina Damotseva; iStock by Getty Images)

Israel’s economy will post negative growth this year due to the coronavirus crisis, but will recover in the second half of the year and resume growth next year, a top economist at the Finance Ministry forecast in an interview with The Times of Israel.

“Our projection for overall growth rate for 2020 will be minus 2%,” Lev Drucker, deputy chief economist, said by phone as the Finance Ministry was scheduled to imminently publish the details of a economic rescue package. The Israeli economy has seen a surge in unemployment rates after businesses shut down their activities and workers were sent home following the spread of the coronavirus, which has killed thousands globally and 15 in Israel.

The ministry is working in accordance with global projections that foresee a V-shaped recovery, he explained, in which economies worldwide and in Israel will see “a very strong decline initially” in economic activity and a rise in unemployment, but with the assumption that recovery will be rapid.

Overall, world growth in 2020 is expected to be “close to zero at best, or even negative. But… some of the negative impact that the global economy is experiencing will be recovered in the next year,” Drucker said.

Lev Drucker, deputy chief economist at Israels Finance Ministry (Courtesy)

The Israeli economy grew 3.3% in 2019, its slowest pace since 2015 and below the 2018 rate of 3.4%, the Central Bureau of Statistics said in an estimate in December. The figure was, however, the highest in Western countries and almost double the OECD average of 1.7%.

Drucker said that when calculating the impact of the coronavirus on the economy, the ministry looked at both global developments and their impact on Israel and the stringent quarantine steps imposed locally by the Health Ministry.

He said that the ministry believed global developments would reduce Israel’s GDP by 2.3%, while the steps implemented by the ministry, if in effect till the end of April, would hit growth by an additional 1.7%.

“Adding this estimate to our assessment of the decline due to the global situation, and the pace of recovery, we are estimating aggregate economic costs of the coronavirus to the Israeli economy at close to 5% of GDP —  which basically means that our projection for overall growth rate for 2020 will be minus 2%.”

The ministry’s forecast for growth for the year, before the crisis, was 3 percent, Drucker said.

Rather than calling it a recession, Drucker prefers to use the term “a technical recession,” signifying a decline in economic activity that “could be resolved fairly soon and very fast.”

Medical personnel wearing protective gear handle a coronavirus test sample at Hadassah Hospital Ein Kerem in Jerusalem on March 24, 2020 (Yossi Zamir/Flash90)

Historically, he said, Israel has witnessed drops in growth and consecutive years of very low growth, such in the early 2000s.

Overall, he said, “we are a very agile economy. I really believe in the potential to recover fairly fast – considering the global economy will be recovering as well.”

The set of steps the Finance Ministry has already announced and is set to announce, he said without going into details as the latest plan was being hammered out by the budget department, would focus on three main points: providing liquidity for businesses with loans that are subsidized by the government; making sure workers and self-employed professionals continue to get money to spend; and injecting funds into the health system.

Government officials were reportedly nearing an NIS 80 billion ($22 billion) package to help businesses struggling under the coronavirus crisis.

The aid package was scheduled to be published later on Monday after deliberations between Treasury officials and Prime Minister Benjamin Netanyahu’s office, as it became clear that an earlier NIS 4 billion plan would fall well short of keeping the ailing economy alive.

The deal will reportedly include a NIS 5 billion ($1.4 billion) fund to help small business and NIS 6 billion ($1.7 billion) for large businesses. The deal also includes a fund for leveraged loans to help businesses that have already taken on considerable debt to manage the credit crunch as the global economy contracts, according to the Calcalist business daily, citing unnamed sources involved in the talks.

Illustrative image of economic downturn, recession, and crashing stock markets (SARINYAPINNGAM; iStock by Getty Images)

The government is also paying unemployment benefits to people who have been put on unpaid leave by their workplaces.

Over 750,000 people, more than 20 percent of the workforce, have filed for unemployment since the start of March, as the virus restrictions first hit the tourism industry and later reverberated through the rest of the economy.

The steps are needed “to minimize long-lasting damage to the economy and allow a fast recovery,” Drucker said, and they will be amended and adjusted according to health developments on the ground.

The Bank of Israel said last week that it would buy NIS 50 billion in government bonds on the open market to ease credit conditions and bolster the economy amid the coronavirus crisis.

The move was the latest in a series of measures by the bank to stabilize the economy as it deteriorated amid skyrocketing unemployment, government restrictions, shuttered businesses, plunging equities and consumer concerns.

The Governor of the Bank of Israel, Amir Yaron (YouTube Screenshot)

The massive bond purchases will allow the bank to influence bond yields, lower the cost of longer-term credit for companies and households, moderate bond volatility and stabilize markets, the bank said.

The initiative “is important to provide more indirect credit to the Israeli economy” and allow the government to finance its activities, Drucker said.

Drucker forecast that the crisis and the steps to curb its impact would cause the budget deficit — the difference between a government’s income and how much it spends — to balloon to 7% of GDP. Israel’s deficit in 2019 came in at 3.7% of GDP, higher than the 2.9% target set by the government for that year.

A budget deficit that is within target is one of the indicators of fiscal restraint and responsibility, data on which international ratings agencies such as Standard and Poor’s and Moody’s decide how to rate credit-worthiness.

The ratings provided by these agencies determine how easily and cheaply Israel and other nations can raise funds on international debt markets. A lower rating means that countries need to pay higher interest rates on the money they borrow. A ballooning deficit could thus make it more expensive for Israel to raise funds abroad, if the credit agencies change their ratings for the nation.

“We are in extraordinary times,” said Drucker. “There is an understanding by the credit agencies as well that we are in a temporary situation due to the global crisis which is not unique to Israel — and there is more short-term fiscal space available.”

Is this crisis similar to the financial meltdown of 2008 or is it different?

“In 2008 there was a structural problem,” he said. The financial markets were not operating, there were toxic assets, and there was lack of credit.

“The financial crisis led to a real one and subsequently to a fiscal crisis in some countries – particularly Europe.”

If today’s scenario “is as the global forecasters envisage, in a sense that we will be recovering in the second part of this year and next year, there is currently nothing which ‘has been broken’ in the global economy, and this is different from 2008,” Drucker said.

This “leaves more room for optimism,” he said.

Drucker warned that there is a danger of a whole lot of unforeseen scenarios still playing out, mainly on the health side rather than on the economic front. “The range of possible scenarios is wide – and some could be less positive.”

All in all, Israel’s economy should be in tandem with developments in the global economy.

“Some of the areas could be even positively affected — like more distant work will provide demand for Israeli tech solutions — but it is very early at this stage to discuss,” he said.

There is no reason that Israel economy should be affected more negatively than other economies, he added. “We don’t see any specific sector in Israel that is being affected that is not affected abroad even to a greater degree. There could be some areas of activity which could actually benefit, like the tech. Not all the tech. Startups could be more negatively affected due to shortage of finance but it also depends on the products and the services that the companies provide.”

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