IMF says Israel’s economy weathering COVID better than many

Per the International Monetary Fund:

The Israeli economy entered the COVID-19 pandemic from a position of strength, and the authorities mounted a large and rapid response to the crisis. Timely and decisive measures introduced by the Bank of Israel at the outset of the pandemic have helped preserve market and financial stability and access to credit. Fiscal support to the health system, households, and businesses has also helped soften the economic impact of the pandemic.

Real output has contracted less than in other advanced economies in 2020 and is projected to rebound in 2021. Nonetheless, the outlook remains uncertain and dependent on the evolution of the pandemic.

In this challenging environment, policies should continue to provide support to the economy, contain the risks associated with the pandemic, and promote recovery. Fiscal policy needs to become gradually more targeted to maximize the impact of the available fiscal space. Monetary and financial policies need to remain accommodative. Structural policies should aim at mitigating labor market vulnerabilities, limiting the potential long-term impact of the pandemic, and fostering a more inclusive recovery.

The Israeli economy faced the COVID-19 pandemic with strong fundamentals. Real annual GDP growth was around 31⁄4 percent and the current account averaged 31⁄2 percent of GDP in the last 5 years. Unemployment had reached 3.6 percent at end-2019 —the lowest rate in the last two decades. Public, household, and corporate debt were at comfortable levels, and external debt was below 30 percent of GDP at end-2019. Banks enjoyed strong capital, high asset quality and liquidity. Israel’s foreign assets exceeded foreign liabilities by 40 percent of GDP and international reserves reached 33 percent of GDP. The government has been financing in global markets at low rates.

The impact of the pandemic was unprecedented. More than 320,000 people have contracted the disease and 2,700 lives have been lost. Lockdowns introduced in March and September contained the spread of the virus but, together with social distancing, suppressed economic activity throughout 2020.

The authorities mounted a large and rapid response to mitigate the impact of the pandemic. The Bank of Israel launched sizeable measures to provide liquidity, prevent a credit crunch, and ease access to financial services and credit, including for small businesses and households. Besides lower interest rates, wide ranging measures included asset purchase programs for government and corporate bonds and term funding to banks to extend loans to small and medium enterprises. Foreign exchange operations reduced pressures on the shekel. Easing of macroprudential and supervisory requirements allowed the banks to support the economy. Several fiscal stimulus packages reaching 151⁄4 percent of GDP (of which 101⁄4 percent of GDP planned for 2020) were also approved, including support for healthcare, benefits for unemployed and furloughed workers, grants for self-employed and households, guaranteed loans for companies, and infrastructure support.

While the measures calmed markets, supported confidence, and limited the economic damage, the outlook remains challenging. With extensive policy support and with resilience stemming from Israel’s ICT sector, real output has contracted less than in other advanced economies so far in 2020. Nonetheless, a significant output decline is projected for the year. Unemployment, including those who were furloughed, is likely to remain in double digits. And greater unemployment among lower-income workers is likely to exacerbate Israel’s already high income inequality. While the recovery is projected to commence in 2021, social distancing will likely continue to constrain domestic demand and drag GDP growth.

Risks are unprecedented. In the near term, the evolution of the pandemic is expected to have a major impact on the economic outlook. Early wide-spread distribution of an effective vaccine would lead to a faster-than-projected recovery. However, an escalation of the pandemic could require a prolonged use of containment measures and social distancing, bringing further disruptions to economic activity. Extensive fiscal support could limit fiscal space and create financing constraints. Failing to contain the pandemic could drain political capital and raise discontent. Among other risks, geopolitical ones—while significant—have become more balanced, especially after the recent bilateral accords.