Israel’s third quarter growth is a clear sign that the emergency furlough payments have been an important stabilizer early on, but more support will be needed in order to maintain high growth in the coming months.
The first lockdown in March hit Israel mildly, relative to other OECD countries, and the Israeli economy showed robust growth in the months following the end of the restrictions. Israel’s GDP plummeted 28.7%following the first lockdown, the biggest drop ever recorded. However, the situation in other developed countries proved to be even worse: the U.S suffered a 33% fall in GDP following the March lockdown, while Germany’s GDP fell by almost 35%t.
Israel has also enjoyed a relatively robust recovery in the second quarter, with growth reaching 8.4% – higher than Germany (8.2%) and the U.S (7.4%). Other OECD countries showed double digit growth, but have also suffered much deeper slumps in growth. Apart from South Korea, Israel has been hit the least hard by the first lockdown.
What stands out in Israel’s growth statistics is the robust recovery in consumer activity. Private consumption skyrocketed in the months following the first lockdown, with many Israeli households catching up on shopping starting in April. Large household item sales jumped 38% in the third quarter, while clothing and smaller consumer items jumped 23%. Private expenditure on services, especially hospitality and dining, doubled itself in the months following the first lockdown.
What allowed for such a robust recovery in private consumption was the emergency measures taken by the government to minimize the impact of the crisis on household incomes. As soon as restrictions were announced in mid March, the government extended unemployment benefits to all furloughed workers, thereby covering a large part of their lost income. During the first lockdown period, government expenditure jumped 25%, mostly due to the emergency unemployment payment program. With close to a million Israelis currently out of work, spending on unemployment payments remains high, and grew by 5% in the third quarter.
Unemployment payments have proved to be an outstanding tool for stabilizing the economy in the short term, and have certainly contributed to the relatively low level of economic stress inflicted by the COVID-19 pandemic. However, there is very little reason to believe that the next growth report will be as optimistic.
It is important to bear in mind that the statistics published this week provide a snapshot of the Israeli economy six months back. Unemployment benefits are substantially lower than wages. In Israel, they cover approximately 60-70% of lost wages. Almost a million Israelis are currently out of work, and many have been unemployed since March. What this means is that the longer the pandemic drags on without additional support, households will suffer a heavier loss of income.
With the third lockdown seemingly just around the corner, and with few Israelis seeing reason to believe that their situation is set to improve, many households may decide to be cautious with spending, preferring to save what they can, or at the very least reduce expenses. Unless further support is provided, this may translate into a blow to the economy as a whole, with private expenditure significantly lower than what seems to have been the case after the first lockdown.
The best way to ensure that the Israeli economy maintains its resilience in face of the pandemic is to offer comprehensive support to as many households as possible, who will then keep spending money in the economy and providing income for businesses. Unfortunately, the government seems to be trapped in an ideological insistence on keeping public expenditure low, despite its importance as a stabilizing factor for the economy. The government has yet to use an additional 11 billion shekels authorized as part of the emergency coronavirus fund, and seems adamant to reduce costs, even at the expense of the economy as a whole.