Israel at 73: How the tech sector saved the economy from the worst of COVID
Nation seems to be winning virus battle, with economy hit, not shattered; political deadlock, inequality, unemployment and creaking infrastructure are wars still waiting to be won
As Israel celebrates its 73rd birthday the nation seems to be winning the battle against the deadly coronavirus pandemic, emerging from a series of lockdowns with a battered economy and massive unemployment, but still in a better situation that it could have been in without its booming tech sector.
Israel’s gross domestic product contracted by 2.5% in 2020 due to the pandemic, with enforced social distancing shuttering businesses and economic activities. Unemployment shot up to its highest level in at least 50 years, to an average of 15.7% for the year, compared to a record low of 3.8% in 2019. Private consumption dropped by 9.5%, and GDP per capita by 11%. The government deficit ballooned to 11.6% from 3.7% in 2019, and the debt-to-GDP ratio surged to 72.6% from 60% in 2019.
Even though the recession was the worst-ever crisis witnessed by the economy, Israel still fared better that other developed nations: the economy in the European Union declined by 6.6% last year; by 3.5% in the US; and by 5.5% on average in OECD countries.
One of the key reasons for this is that the nation’s tech economy has continued to thrive, even as workers moved their offices to their homes, setting up workstations in their kitchens and living rooms and plugging away at their laptops with their children and pets scampering around.
Exports, not including diamonds, continued to grow in 2020 and were up 1.9% even as global trade declined, mainly due to the fast growth of sales of technology services. Demand for digital and data security products surged as the world moved activities online due to the pandemic.
“Exports played a key role in curbing the hit of the crisis on the economy,” the Bank of Israel said in its annual 2020 report. Advanced services exports, or in other words tech exports, “witnessed high global demand, which stayed strong, especially in fields in which Israel specializes.”
Unlike other sectors hit by the pandemic in which physical presence is required to function, such as restaurants and hotels, the tech industry could move its activities online and continue its work almost undisrupted. Deals, mergers, SPACS, fundraising were all clinched remotely, and the sector has generally thrived, with tech firms attaining record high valuations and companies raising vast amounts of money in investment rounds.
Israeli tech firms raised a record $9.3 billion from investors in 2020, and had a record first quarter of 2021, raising a massive $5.5 billion, more than double the sums raised in the same period a year earlier and 89% higher than the funds raised in Q4 2020, a report by IVC-Meitar shows.
“The increase in activity of the technology service industry since the beginning of the year is perhaps an X Factor that we did not take into account, and may increase growth this year even beyond our forecast of 5.0%,” Bank Hapoalim said in its weekly note on the economy. Initial public offerings and acquisition deals are not measured as part of the nation’s GDP, “but past experience shows that in such an environment, growth estimates tend to be updated upwards retroactively,” the note said.
The wave of IPOs and acquisition deals for Israeli high-tech companies was of an “unprecedented scale” in the past year, with a leap in the value of transactions and heightened activity of foreign firms in Israel, the bank said in its note.
Google said it was planning to set up a chip development center in Israel, chip maker Nvidia said it was expanding its workforce of engineers, and Microsoft is reportedly seeking to invest over $1 billion in Israel.
Amid a world-leading vaccination drive that is lowering the rate of virus infections, the economy is now exiting the crisis. There are now almost 5 million people in Israel who have been vaccinated with both required doses, out of a population of about 9 million. Families are meeting and hugging again, and holiday celebrations and commemoration ceremonies are all happening, even as masks are still mandatory.
Israel’s economy will grow 5% this year, the International Monetary Fund forecast earlier this month. Broad unemployment — including jobless and furloughed workers — declined in March to 12%, and private consumption is growing rapidly. The nation’s fiscal deficit narrowed for the first time since the start of the coronavirus crisis, to 12.1% of GDP for the 12 months to the end of March, from 12.4% of GDP at the end of February, according to the Finance Ministry.
Yet much remains to be done to get back on track. The nation, in a political stalemate after a fourth inconclusive general election in two years, has been without a budget since 2018, and economists and the central bank governor all emphasize the need for political stability and a state budget. There are still almost half a million people who have not returned to the workforce, and there is concern that chronic unemployment could continue to dog the nation for years to come.
“After four rounds of general elections in the last two years with no conclusive results, the polarization and tensions among the people has intensified,” said Victor Bahar, the chief economist at Bank Hapoalim. “This has cast a shadow over the economic and logistic achievements of being the fastest country in the world to vaccinate most of its adults.”
Israel held its fourth election in two years in March, which ended inconclusively, with a fifth round seen as a growing possibility as Prime Minister Benjamin Netanyahu, on trial for corruption, and his rivals all lack a clear path to forming a government.
Out of sync
The coronavirus crisis has increased income inequality around the world and “Israel is no exception,” Bahar said. “Lockdowns hit low-income workers, while the high-tech sector flourished.”
The vast majority of the population remains out of sync with the booming tech sector, he said, which still accounts for just some 10% of the nation’s workforce.
Education inequality in Israel is even higher than income inequality, he said. And not enough young people are trained for jobs in the tech industry.
“The economy cannot afford losing that manpower, neither financially nor socially,” Bahar said.
Israel needs a stable government and a budget as soon as possible to help it get out of the coronavirus-induced economic crisis, Bank of Israel Governor Amir Yaron said last week. “Without a government we cannot advance the programs and structural changes that the economy needs.”
Ratings agency S&P warned in a March memo that that if the political uncertainty persists, the parliamentary deadlock could make it more difficult for policymakers to reach consensus on economic issues.
A budget will help set out infrastructure works and projects that will create jobs. Programs are needed to retrain workers for the changing demands of the workplace. And taxes will likely also have to rise to rein in ballooning national debt, the Bank of Israel Governor has warned. The younger generation will have to foot the bill of the massive spending that the government implemented to curb the effects of the pandemic on the economy.
US President Joe Biden’s $2 trillion plan to rebuild the US infrastructure and reshape the nation’s economy post-pandemic “is a reminder” that Israel needs one too, said Hapoalim’s Bahar.
“A fast-growing population is a blessing that easily can turn to a curse, with heavy traffic and no means of mass public transportation,” he said. Israel’s population grew by 1.8% in 2020, a much higher rate that the average 0.5% for OECD nations.
Home prices are soaring as supply struggles to catch up demand, and infrastructure, including internet, roads and public transportation, is “poor relative to the level of income, and it’s not something that the so-called Startup Nation can be proud of,” Bahar said.
“On its 73rd birthday, Israel is far from being an emerging market. GDP per capita stands at $44,000, a level actually higher than that of France and the UK. We are a rich country,” said Bahar.
“Since the establishment of the country, the economic narrative was the story of David and Goliath. A small country in a hostile neighborhood, with no natural resources, and heavy defense burden.”
But much has changed in the past 73 years, he said. Israel has signed the Abraham Accords, normalizing ties with Gulf countries and others. Israel is also today a natural gas exporter, and the share of defense expenses as a percentage of its economy has declined.
“The COVID crisis has been a catalyst for that new narrative, and has highlighted that Israel is a strong economy that can cope with adverse challenges even better than most European countries,” said Bahar. “But the nation still has a long way to go in terms of infrastructure and equality.”
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