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OECD sees Israel economy grow 2.3% in 2021, below global average

Israeli GDP seen contracting 4.25% in 2020, amid increased unemployment and insolvencies after second national lockdown; report urges passing of state budget

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

Self-employed, small business owners and activists participate in a rally calling for financial support from the government in Tel Aviv, May 2, 2020. (Miriam Alster/Flash90)
Self-employed, small business owners and activists participate in a rally calling for financial support from the government in Tel Aviv, May 2, 2020. (Miriam Alster/Flash90)

The OECD is projecting Israel’s economy will grow a mere 2.3% in 2021, below the global average, after contracting 4.2% this year, as increased unemployment and a likely rise in insolvencies after a second national lockdown “will weigh” on economic recovery.

“The projections assume a more gradual exit from the second lockdown compared to the first one,” the OECD said in its December 2020 Economic Outlook report published Tuesday. “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uncertainty, increasing unemployment in the near term, and a likely rise in insolvencies once government support is withdrawn will weigh on consumer demand and investment.”

The OECD forecasts world GDP to contract by 4.2% this year, with a 7.2 percent drop for the Euro area and a 3.8% decline for G20 nations. GDP in the US is expected to contract by 3.7% and in the UK by 11.2%.

World GDP will grow by 4.2% in 2021, and by 3.7% in 2022. The US economy will grow 3.2% and the Euro area’s 3.6% in 2021.

As infection rates surged in the summer after Israel exited a first economic lockdown imposed in the spring to curb the coronavirus spread, the government  imposed a second national lockdown from mid-September to mid-October over the Jewish holiday period. A gradual reopening of the economy has begun, even as there are signs that infections are once again on the rise.

Demand from Israel’s main trading partners will pick up only gradually, the report said, and unemployment levels will start to fall slowly in 2021 but continue to remain above pre-crisis levels at the end of 2022. The broadly defined unemployment rate, which includes temporarily laid-off workers and people who left the labor force due to the pandemic, increased again to around 20% in October.

“A deterioration of the health situation requiring new nationwide lockdowns would delay the recovery further until immunization becomes general,” the report said in its Israel section. “Growth could be weaker if there are “heightened geopolitical tensions or renewed internal political uncertainty. ”

Macroeconomic policies should continue to be “supportive” and adapt to the changing circumstances, the report said.

“Approving a budget for 2021 as soon as possible would reduce uncertainty and improve fiscal transparency,” the report said.

The 2020 and 2021 state budgets have not been passed, amid a standoff  between Prime Minister Benjamin Netanyahu and his coalition partner Benny Gantz.

The extension of some “exceptional support measures until mid-2021 is welcome,” but these 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 report said.

Government debt-to-GDP ratio is expected to be 75% this year and rise to 88% in 2022, the report said, and the budget deficit this year will be around 13%, compared to 3.9% in 2019. It will decline to 8.1% in 2022, the report forecast.

Global recovery “would be stronger if vaccines are rolled out fast, boosting confidence and lowering uncertainty,” the report said. “Delays to vaccination deployment, difficulties controlling new virus outbreaks and failure to learn lessons from the first wave would weaken the outlook.

“The bounce-back will be strongest in the Asian countries that have brought the virus under control but even by the end of 2021, many economies will have shrunk from 2019 levels before the pandemic.”

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