Updated: Mar 9, 2020
The Israeli economy left 2019 on a high note. The final year of the prosperous decade waltzed into 2020 with a grande finale. But can Israel withstand a rising budget deficit, ongoing political instability and the economic implications of the coronavirus?
A Record-Breaking Year for the Economy
Israel’s 2019 growth rate of 3.3% may seem low, but don’t be fooled. The number was well above the 1.1% 2019 GDP average for OCED countries, with Israel topped by Ireland alone. In the past year, the shekel strengthened, consumer prices dropped, wages rose, income inequality fell, and labor force participation was sky-high. Unemployment slid to a record low in November 2019, followed by another record low in December!
The tourism industry also reached new heights. Individuals flocking to Israel from around the world numbered 4.55 million, an 11% increase from 2018. This can possibly be attributed to what Tourism Minister Yariv Levin calls an “‘ongoing revolution in marketing Israel around the world’” initiated by the Ministry.
Experts are predicting a similar growth rate for 2020, suggesting the economy is strong enough to withstand the fallout from the political deadlock and regional tensions. Investors show no signs of bearishness, and over $800 million was raised by startups this January.
One significant factor in the positive growth forecast is the economic potential of the Leviathan gas field. The field is one of the largest found in the last decade and may turn Israel into a leading energy exporter in the region. Israel is currently exporting gas to Jordan and Egypt.
But let’s not get ahead of ourselves. “Regular” regional tensions notwithstanding, Israel faces an abundance of internal and external issues likely to impact the economy. How well the country can withstand these pressures is subject to some debate.
The Political Deadlock
The current political deadlock is thought to have major economic implications, but are they positive or negative? Since reports that the budget deficit at the end of December 2019 was a steep 3.8%, well above the 2.9% goal, the many experts expressed major concern for the economy. The Ministry of Finance made a gloomy prediction that in 2021 the deficit would reach 4.2% of GDP unless it makes 30 billion shekels.
A new report by the Ministry told a different story. According to data as of January 31, 2020, the budget deficit declined all the way down to 3.2% due to a surplus of 5.9 billion shekels this month. This is being attributed to the fact that the government is currently operating on a temporary budget and is restricted from increasing spending until new leadership is elected.
For the time being, investors don't seem to be slowing down. They look at Israel's high growth rate and past success in reducing the debt-to-GDP ratio and continue investing. Many economists believe that the market has faith that a new government will form and will deal with the deficit. If this doesn't happen, it could turn the market bearish and hurt economic growth.
Other experts, like Mati Gil from Teva Pharmaceutical Industries, are worried by investors' frequent questions regarding the government crisis and believe that they are likely to prefer to market their products in other countries before Israel. They want to know what the policies will be 3-5 years in the future, a question that Israeli companies can't answer.
Another downside of having no government is the inability to issue new contracts as spending in areas such as agriculture, transportation and infastructure cannot be in increased at the moment. Many businesses rely on the income they receive from these contracts, and the current situation puts them at a significant loss.
Israelis will head to the polls in a few weeks with hopes of electing a new Knesset. Will the budget deficit rise or continue to fall? Is it better for the economy if the government is limited in its spending? How confident will investors be in Israel if the upcoming elections yields no results?These are questions that will likely be answered in the coming months.
As if Israel didn't have enough to deal with, a new curveball was thrown our way. To be fair, it isn't just Israel, but the entire world that is suffering from coronavirus-related anxiety. While it is way too early to assess what type of impact the disease will have, it seems like there will be some economic implications.
The most significant issues are related to imports and exports. According to a chief economist from Bank Leumi, there will be a likely slowdown in supplies from China if the virus isn't contained soon. This includes things like clothes, shoes, manufacturing materials, and more, and could harm importers and result in higher prices for consumers.
An analysis by Israel's Central Bureau of Statistics assesses that the tech and diamond sector will "suffer a direct hit" as a result of the outbreak. Exports of goods and services to China came in at around $9 billion in 2019. Being that China is the largest global exporter, it is safe to assume that the world, including Israel, will feel the "shockwaves" of any major damage to its industry.
Other sectors that might be directly affected by the coronavirus are construction and tourism. Many construction workers come to Israel from China, and recent travel restrictions could have unfavorable consequences. Only 3.5% of annual tourists come from China, but the industry may experience some negative effects.