The Israeli economy recorded its worst 3 months ever in the second quarter of 2020, according to data published Sunday by the Central Bureau of Statistics. The social distancing and closure measures taken during most of the quarter (April-June) sent the Israeli economy to a contraction in gross domestic product (GDP) of 28.7% compared to the first quarter, when “only” two weeks of social distancing measures were recorded, which resulted in a decrease of 6.9%.
Israel is officially in a recession. In the first half of the year, there was a decrease of about 10% in GDP compared to the last half of 2019.
However, even though this is the sharpest decline in GDP ever in Israel, compared to the rest of the world the picture is less harsh. According to the CBS data, the EU countries and the eurozone contracted by about 40%, the United States by 33%, and in the case of the UK and Spain, the collapse reached more than 50%.
Israel’s contraction is reminiscent of that of Sweden (which did not take any of the social distancing steps taken by Israel), but it is still far from that of South Korea (about 20%), and the latter is considered an outstanding country in dealing with all respects of the coronavirus pandemic.
According to the CBS, in terms of GDP levels, the contraction in the Israeli economy returned the economy to the level of GDP (after allowing for inflation) similar to the fourth quarter of 2016.
The biggest impact of the pandemic in Israel was on business output, the real engine of the economy that contributes about 75% of GDP: it retreated by about 33% (about 35% if start-ups are not considered) in the second quarter – more than the impact on overall GDP. The data show that every manner of spending has collapsed other than government spending, which has skyrocketed and at an unprecedented rate – about 25% for the year – which is common in times of war in Israel.
In this context, the CBS notes several important and somewhat contradictory items: the government’s net purchases have soared by about 81% and reflect its exceptional spending for medical supplies; on the other hand, the compensation for employees (which reflects the actual working hours) which is included in the data on civilian consumption fell by 34.3% on an annual basis following the forced unpaid vacations during the month of April; on the other hand yet again, there was a sharp and unprecedented jump of 145% in defense spending in the second quarter of 2020, which can be explained by an increase in defense imports.
Nevertheless, the most damaged growth engine was the most important component of the Israeli economy: private consumption, which constitutes about 54% of GDP. According to the CBS, private consumption fell significantly during the coronavirus crisis at an unprecedented rate of about 43.4% in the second quarter, following a decline of 24% in the first quarter. In the first half of the year, private consumption collapsed by about 22.4% compared to the second half of 2019.
As a result, private consumption per capita, known as the “standard of living,” fell by 44.2% and includes items such as spending on food, beverages and tobacco, personal services, housing, fuel and home electricity. Altogether Israel marked an unprecedented decrease of 80% in the consumption of services, with a particularly significant impact on transportation services (both in country and on flights abroad), hospitality services and culture, leisure and health services.
Still, spending on food, beverages and tobacco per capita decreased by only 8% on an annual basis, a relatively minor decrease which is reflected in the data on credit card use, both according to the CBS and the Bank of Israel.
These poor data on the growth level of the economy herald a collapse in imports, which also fell by about 42% in the second quarter of 2020, after a decline of 22.4% in the first quarter. A particularly sharp decline of 74% was recorded in the import of services, which reflects the halt in Israeli tourism abroad (which is recorded as imported services – DI).
Another piece of bad news: as a result of the pandemic, there was a sharp decline in working hours in the construction industry, resulting in a significant decline in investment in residential construction, which fell by 41.6%.
And yet there’s also good news: investments in information and communications technology (ICT) industries have jumped 49.7% on an annual basis, apparently as a result of the acquisition of software by the business sector which moved to working with Zoom. Exports of other services, including software, transportation and communications services, increased by about 6%.