Israel - OECD Economic Outlook June 2020

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Israel1 The economy is facing a severe recession this year with GDP projected to fall by 8.3% if the COVID-19 outbreak returns later in the year (the double-hit scenario) and by 6.2% if the pandemic subsides by summer (the single-hit scenario). Containment measures have been stringent but of a shorter duration than in other OECD countries, which moderated the downturn. However, activity is set to recover only gradually and the GDP level will remain below pre-crisis levels at the end of 2021, as high unemployment and uncertainty weigh on domestic demand and external demand picks up only slowly. In the double-hit scenario, additional firm insolvencies and prolonged unemployment will further weaken the recovery and inflict more severe long-term damage to the economy.

The government and the central bank have put in place appropriate measures to support household income and firms’ liquidity. Fiscal policy should remain supportive until the recovery is well on track. Further measures to retain employment, strengthen training and enhance liquidity to small firms may be necessary if the recovery is weak. If financial conditions tighten, the central bank could expand asset purchases and ease prudential measures further.

Israel Another virus outbreak would dent the recovery Index 2019Q4 = 100, s.a.

110

Unemployment claims have surged

Real GDP

Thousand persons 1400

% of labour force →

Single-hit scenario Double-hit scenario

105

1200

% 35 30

← Dismissals ← Unpaid leave

1000

100

25

← Other

800

20

600

15

400

10

200

5

95 90 85 80

2019

2020

2021

0

0

Feb 2020

Mar 2020

Apr 2020

0

Source: OECD Economic Outlook 107 database; and Israel National Employment Service.

StatLink 2 https://doi.org/10.1787/888934139575

1

The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION © OECD 2020

238 _

Israel: Demand, output and prices (double-hit scenario) 2016

2017

Current prices NIS billion

Israel: double-hit scenario GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1 Total domestic demand Exports of goods and services Imports of goods and services Net exports1

1 225.0 670.9 274.7 253.7 1 199.2 6.3 1 205.6 363.7 344.4 19.4

Memorandum items GDP deflator Consumer price index Core inflation index2 Unemployment rate (% of labour force) General government financial balance (% of GDP) General government gross debt (% of GDP) Current account balance (% of GDP)

_ _ _ _ _ _ _

2018

2019

2020

2021

Percentage changes, volume (2015 prices)

3.6 3.3 3.4 4.2 3.5 0.3 3.8 4.0 4.9 -0.2

3.5 3.6 4.1 5.0 4.0 -0.4 3.6 5.7 6.3 -0.1

3.5 3.9 3.6 1.1 3.2 0.1 3.4 4.1 3.5 0.2

-8.3 -11.6 5.1 -17.1 -8.8 1.1 -7.6 -10.9 -10.5 -0.3

2.6 4.4 3.1 -1.3 2.9 -0.3 2.6 2.6 2.6 0.1

0.2 0.2 0.0 4.2 -1.1 60.5 2.3

1.1 0.8 0.6 4.0 -3.6 60.9 2.6

2.3 0.8 0.7 3.8 -4.0 61.7 3.5

0.5 -0.6 -0.1 8.0 -12.1 78.7 3.4

0.9 0.2 0.3 8.8 -10.4 86.6 3.3

1. Contributions to changes in real GDP, actual amount in the first column.

2. Consumer price index excluding food and energy.

Source: OECD Economic Outlook 107 database.

StatLink 2 https://doi.org/10.1787/888934138093

Strict containment measures were introduced swiftly and allowed an early partial reopening of the economy Israel’s first case of the COVID-19 virus was detected on 21 February and the virus spread quickly thereafter. Infection rates have been higher in several Ultra-Orthodox and Arab-Israeli towns and neighbourhoods. Since early April, the daily number of new infections has trended down. The death toll has been lower than in many other OECD countries. Israel’s young population and universal health coverage likely mitigated the human cost of the crisis.

Israel reacted swiftly to the pandemic. It was among the first countries to close its borders to foreign visitors in early March. Educational institutions were closed by mid-March and strict mobility and workforce restrictions were introduced by end-March. Lockdown measures have been flanked by contact tracing using mobile data, widespread testing and additional government funds (around 0.7% of GDP) to increase health sector capacity. On 19 April, a gradual easing of lockdown measures began, starting with the reopening of retail street shops. Since May, most businesses have been allowed to open under health and distancing requirements, movement and gathering restrictions have been lifted and the school system has been almost fully reopened.

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION © OECD 2020

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Israel: Demand, output and prices (single-hit scenario) 2016

Israel: single-hit scenario GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1 Total domestic demand Exports of goods and services Imports of goods and services Net exports1

2017

Current prices NIS billion

1 225.0 670.9 274.7 253.7 1 199.2 6.3 1 205.6 363.7 344.4 19.4

Memorandum items GDP deflator Consumer price index Core inflation index2 Unemployment rate (% of labour force) General government financial balance (% of GDP) General government gross debt (% of GDP) Current account balance (% of GDP)

_ _ _ _ _ _ _

2018

2019

2020

2021

Percentage changes, volume (2015 prices)

3.6 3.3 3.4 4.2 3.5 0.3 3.8 4.0 4.9 -0.2

3.5 3.6 4.1 5.0 4.0 -0.4 3.6 5.7 6.3 -0.1

3.5 3.9 3.6 1.1 3.2 0.1 3.4 4.1 3.5 0.2

-6.2 -8.8 4.9 -14.1 -6.6 1.1 -5.5 -8.5 -8.3 -0.2

5.7 8.9 1.4 4.3 6.0 -0.3 5.6 6.7 6.4 0.2

0.2 0.2 0.0 4.2 -1.1 60.5 2.3

1.1 0.8 0.6 4.0 -3.6 60.9 2.6

2.3 0.8 0.7 3.8 -4.0 61.7 3.5

0.6 -0.5 -0.1 7.5 -11.1 76.2 3.4

0.9 0.4 0.4 6.6 -8.4 80.1 3.4

1. Contributions to changes in real GDP, actual amount in the first column.

2. Consumer price index excluding food and energy.

Source: OECD Economic Outlook 107 database.

StatLink 2 https://doi.org/10.1787/888934138112

Economic activity has slumped During the peak of the lockdown from end-March to mid-April, around a third of the economy was shut down. Business and consumer confidence plunged and real GDP contracted by close to 2% in the first quarter of 2020, driven by a sharp fall in domestic demand. Nominal goods exports declined by about a quarter year-on-year in April, while visitor arrivals from abroad almost halted. Data from credit card purchases suggest a relatively quick rebound in consumption to close to pre-crisis levels by end-May in areas where the restrictions have been lifted early. However, in other sectors, such as tourism, restaurants and leisure activities, expenditure remains depressed. Unemployment claims have surged to more than a million in April, or about a quarter of the total workforce. The large majority of these new claims (close to 90%) are from furloughed employees, who may return to their workplaces once the economy recovers.

However, at least part of temporary lay-offs are likely to become permanent given the severity of the crisis.

Government support is substantial The government and the central bank have taken a wide range of measures to cushion income losses for the most vulnerable people and firms, provide liquidity to banks and the business sector, and support the recovery. The government’s aid package includes spending and revenue measures amounting to around 4.5% of GDP together with liquidity measures, such as loan guarantees and tax payment deferrals, of around 2.5% of GDP. The main measures include broadened eligibility to unemployment benefits (for

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION Š OECD 2020

240 _ example for furloughed workers), grants to firms to rehire furloughed workers, direct payments to vulnerable groups such as the elderly, families with children and the self-employed, as well as a temporary reduction in property taxes and subsidies to small firms to cover fixed costs. Furthermore, the Bank of Israel launched a programme to purchase government bonds (up to 3.5% of GDP), lowered the policy rate from 0.25% to 0.1%, and established a credit facility for SMEs via banks. It also injected liquidity, including foreign exchange liquidity, and reduced the capital adequacy ratio for banks by one percentage point.

A gradual recovery could be delayed by a second wave of infections The projections assume a continuing reopening of the economy from the end of April 2020 in the single-hit scenario, and a second outbreak of infections in autumn in the double-hit scenario. In both scenarios, domestic demand will pick up gradually, supported by government’s measures to limit income losses.

However, high uncertainty will weigh on the recovery, in particular of investment. Unemployment, after increasing strongly, will fall only slowly and remain above the pre-crisis level at the end of 2021. Weakness of global demand will hold back export growth. In the double-hit scenario, the negative effects on activity will be more severe and persistent, due to a higher number of insolvencies and longer unemployment spells. The general government budget deficit is set to increase sharply from an already elevated level of around 4% of GDP before the crisis, but will narrow in 2021 thanks to a rebound in tax revenues and the termination of temporary support measures. Heightened geopolitical tensions are a downside risk to the outlook.

Additional policy action may be needed to support the economy Depending on the speed of the recovery, some of the government’s temporary income support measures may have to be prolonged, especially if a second wave of infections requires renewed shutdowns. State guarantees for loan losses are relatively low compared to other OECD countries and could be expanded, especially for small firms to support their liquidity. The government plans to strengthen the recovery inter alia by accelerating infrastructure investment projects, which is welcome. This should be complemented by stepping up active labour market policies, such as retraining and job search support, to help those most at risk of permanently losing their jobs and facilitate efficient labour reallocation from sectors facing extended weak demand. Efforts to improve the skills outcomes of groups with low labour market attachment should also be continued. The relatively low level of public debt prior to the crisis provides some fiscal space. If necessary, financial conditions could be further relaxed by expanding the central bank’s asset purchase programme and by further easing of prudential measures.

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION © OECD 2020