Israel country note: OECD Economic Outlook, May 2021

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Israel Thanks to a very high rate of inoculation and the reopening of the economy since mid-February, GDP is projected to grow robustly by 5% in 2021 and 4.5% in 2022. The removal of supply restrictions, pent-up demand, the withdrawal of some excess savings accumulated in 2020 and a gradually improving labour market all support strong consumption growth. Investment and external demand are set to strengthen as uncertainty fades and vaccinations progress globally, while high-tech services exports will continue to grow robustly.

Monetary and fiscal policy should remain supportive until the labour market situation improves significantly, while adapting to facilitate the reallocation of workers and capital. Stepping up retraining and job-search assistance can help the unemployed transition to new jobs. A fiscal strategy should be prepared and include policies to strengthen the recovery and make growth more inclusive and environmentally sustainable.

Measures should include investments in the educational system, skills, public transport and climate-friendly infrastructure.

The economy has largely reopened Thanks to one of the fastest vaccination campaigns in the world, around 60% of the Israeli population, and 85% of the adult population, is already fully vaccinated. New and serious COVID-19 cases have plummeted. After a third national lockdown in January, containment measures have been eased since midFebruary and the economy and educational system have largely reopened. In May, the government lifted some restrictions on foreign tourists entering the country.

Israel The reopening of the economy is advanced

Unemployment is still high

Oxford stringency index¹ Index, 100=max 100

Left the labour force due to the pandemic²

% of labour force 50

90

Employed persons temporarily absent due to the pandemic³

45

80

Unemployment

40

70

35

60

30

50

25

40

20

30

Israel

15

20

OECD median

10

10 0

5 Mar-20 May-20

Jul-20

Sep-20 Nov-20

Jan-21 Mar-21

Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 Feb-21 Apr-21

0

1. This is a composite measure based on nine response indicators including school closures, workplace closures, and travel bans, rescaled to a value from 0 to 100 (100 = strictest). The shaded area represents the OECD 10th-90th percentile range.

2. Series includes persons not in the labour force who stopped working due to dismissal or closure of the workplace since March 2020. Data not available before March 2020.

3. This includes employees on unpaid leave, employees who were absent during the week due to reduced workload, work stoppage or other reasons related to the pandemic and excludes quarantined persons.

Source: Oxford Coronavirus government response tracker; Israel Central Bureau of Statistics; and OECD calculations.

StatLink 2 https://stat.link/uopmq1

OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 2021

84 

Israel: Demand, output and prices 2017

2018

Current prices NIS billion

Israel 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

1 269.4 694.6 286.5 262.9 1 244.1 10.2 1 254.2 366.1 350.9 15.2

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)

_ _ _ _ _ _ _

2019

2020

2021

2022

Percentage changes, volume (2015 prices)

3.6 3.6 3.9 5.3 4.0 -0.6 3.4 6.6 6.3 0.1

3.4 3.8 2.8 2.4 3.3 0.2 3.5 4.0 4.1 0.0

-2.5 -9.5 2.7 -4.7 -5.6 0.7 -4.9 0.1 -8.0 2.2

5.0 9.7 -0.6 6.1 6.3 0.1 6.5 7.6 12.8 -0.9

4.5 6.5 0.0 3.8 4.4 0.0 4.2 5.9 4.9 0.5

1.2 0.8 0.6 4.0 -3.6 60.9 2.7

2.3 0.8 0.7 3.8 -3.9 60.0 3.1

1.1 -0.6 -0.1 4.3 -12.1 72.9 4.9

1.3 1.0 0.8 5.5 -8.2 76.9 4.1

1.2 1.0 0.9 5.0 -6.2 79.0 4.3

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 109 database.

StatLink 2 https://stat.link/69twlq

Economic activity is rebounding The economic contraction in 2020 was shallower than in most OECD countries, partly thanks to the strength of high-tech service exports. After a sharp drop in 2020, high-frequency revenue indicators and credit card purchase data suggest a strong rebound in private consumption in spring 2021. Business and consumer confidence are improving. Unemployment, broadly defined to include temporarily laid-off workers and people who left the labour force due to the pandemic, is still high, in particular in sectors such as arts and entertainment, and accommodation. However, labour demand has strengthened, with the job vacancy rate surpassing pre-crisis levels in March. Consumer price inflation has turned positive but remains below the central bank’s target range (1%-3%).

Monetary and fiscal policy continue to support households and firms As part of its asset purchase programme, the central bank had purchased around NIS 62 billion (4.3% of GDP) in government bonds and NIS 3.5 billion (0.2% of GDP) in corporate bonds by end-April. Reduced capital requirements for banks have been extended until September 2021 and the central bank announced in January foreign exchange purchases of USD 30 billion in 2021 to mitigate shekel appreciation. The fiscal policy response has been substantial, largely focused on transfers to households and firms, and additional health expenditures. In addition, the government provided liquidity support and accelerated some investment in infrastructure and digitalisation. The public debt-to-GDP ratio increased from 60% in 2019 to around 73% in 2020. A budget for 2021 has not yet been submitted, but in July 2020 several fiscal support measures, such as grants to hard-hit businesses and eligibility to unemployment benefits for workers on unpaid leave, were extended until June 2021, contingent on the economic situation.

OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 2021

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The economy is projected to recover robustly With a large share of the population already fully vaccinated and the economy reopened, GDP is set to recover robustly by 5% in 2021 and 4.5% in 2022. Pent-up demand, lower involuntary and precautionary saving and withdrawal of some accumulated excess savings will support consumption in the near term.

Investment is to set to strengthen as uncertainty fades. Foreign demand will recover as vaccinations progress globally and high-tech services exports will continue to grow robustly. Unemployment will start to fall in 2021 but will remain above pre-crisis levels at the end of 2022. The fiscal projections include the announced extension of several measures for this year, but assume declining fiscal support over the projection period compared to 2020 as other emergency measures are phased out. The recovery could be slower if the health situation deteriorates again due to the diffusion of new variants of the virus. Growth could also be weaker due to prolonged internal political uncertainty and heightened geopolitical risks. The recovery could be stronger if the government approves more substantial fiscal support than assumed.

Policy support should become more targeted Fiscal and monetary policy support should be maintained until the labour market situation improves significantly, but should be adapted to help the unemployed transition to new jobs and directed to improving productivity, reducing socioeconomic gaps and fostering a greener recovery. Approving a budget for 2021 as well as a medium-term fiscal strategy as soon as possible would reduce uncertainty and improve fiscal transparency. As unemployment benefits are set to expire for many furloughed workers by mid-year, it will be crucial to step up retraining and job-search support. Strengthening the existing earned-income tax credit would improve work incentives for low-skilled workers. More investment is needed to improve public transport infrastructure, pre-school education, digital skills, renewable energy transmission networks and energy-efficient buildings.

OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 2021