Coronavirus damage on economy is four times worse than 2008 crisis

Had it not been for the economic safety net Israel deployed and the aid programs for Corona, the economic damage may have been even worse.

money (photo credit: REUTERS)
(photo credit: REUTERS)
The damage from the coronavirus pandemic on the economy to date is about 5% of GDP, four times the damage from the sub-prime crisis of 2008, and similar to the fallout following the dot-com crash of 2001-2003, the Bank of Israel said in its annual report presented Tuesday.
The main challenges facing Israel’s economy now are taming the fiscal deficit and restoring unemployment to normal levels, Bank of Israel governor Prof. Amir Yaron said. GDP in 2020 fell by 2.5%, led by a 9.5% in private consumption. Unemployment averaged 15.7% over the course of the year.
While Israel may eventually need to raise taxes in order to reduce the debts it incurred during the coronavirus pandemic, tax rates are not expected to rise in 2021, Yaron said at a press conference upon presenting the central bank’s annual report.
Yaron also said he expects inflation to rise “a bit above the target set by the government” as Israel emerges quickly from the pandemic. However, that trend is promising, not worrying, he noted, after inflation for 2020 was -0.7%. Talk of reducing VAT by 2-3 percentage points to increase consumption does not seem relevant now, but could be considered in the future, he added.
The Bank of Israel is in no hurry to raise the interest rate from its current record low of 0.1%. “We have patience,” Yaron said. “We will leave the credit environment more comfortable, with an expectation to keep interest rates lower for longer.” Monetary policy will continue to be expansive, while the central bank will continue to monitor the gap between Israeli and US bonds before deciding whether to continue its bond-purchasing program, Yaron said.
If Israel can’t form a government in the very near future, “it will be very difficult to make the necessary structural changes to the economy,” Yaron warned.
“Relative to other economies our situation is quite good, but we have to take control over the large debt, and return unemployment to reasonable proportions,” Prime Minister Benjamin Netanyahu said upon receiving the report. “This is definitely encouraging, with many challenges and problems, but relative to other Western economies, our situation is quite good, but it must be made excellent.”
“The report presented to us presents a first picture of the challenge we continue to face, its implications for Israeli society, and the way out of the current crisis,” said President Reuven Rivlin. “It shows what we felt in our flesh – that the most severe and significant harm was actually among the weakest populations. This is a bleak picture of the reality in which we live and of the gaps in equality in Israeli society. But at the same time, it is a call to action, reminding us of our commitment to promoting a responsible and prudent economic policy for future generations.”
“According to the Bank of Israel’s assessment, had it not been for the economic safety net we deployed and the aid programs for corona, the contraction in GDP would have increased by another 2-2.5%,” said Finance Minister Israel Katz. “This is the result of a responsible economic policy that I led that earns the State of Israel praise from all credit rating companies and the World Monetary Fund. Now we must continue to take the right actions to get the State of Israel out of the crisis and return the economy to a path of growth.”
Meanwhile, the coronavirus crisis has caused a significant decline in the employment rate and participation of Arab men in the labor market, with a 21% decline in employment and 15% drop in labor participation among Arab men as of January 2021, according to a separate report published Tuesday by the Finance Ministry. This follows a 5% decline in employment from the beginning of 2018 to about 53.9% at the beginning of 2020. Much of this was due to the decline of about 25,000 Arabs working in the sector’s two main employment industries, industry and construction, the report said.