Israel’s economy set for 4.6% growth in 2021

Israel’s economy is likely to grow by 4.6 per cent this year, the Finance Ministry said on Sunday in a forecast reliant on continuation of rapid Covid-19 inoculations and a drop in the infection rate.

In a lower probability scenario in which the health environment deteriorates because of new virus mutations or vaccinations taking longer than expected, forcing further lockdowns, the economy would grow by only 1.9 per cent, the ministry said, adding that its projection for 2020 is a 3.3 per cent contraction. Israel has been a world leader in vaccinating its population against the coronavirus.

“The economy will recover at the rate that had characterized the sub-prime (2008 financial) crisis,” the ministry said of its main scenario, assuming “vaccination of the population in the first half of 2021 when, in this period, there are still limited health restrictions”.

The Bank of Israel has estimated a contraction of 3.7 per cent for 2020 and growth of 6.3 per cent in 2021 if the rapid vaccination pace is maintained. That would fall to 3.5 per cent growth in a slow-inoculation scenario.

According to the ministry, Israel’s economy fared relatively well in 2020 and outperformed an OECD average of a 5.5 per cent contraction. It cited minor damage to exports thanks to high-tech exports.

It noted, however, that unemployment remained high at 15.4 per cent in 2020 and is expected to fall to 8.6 per cent in 2021 in its base scenario and to 11.6 per cent in a more pessimistic projection, with a decline in the average wage in either case.

Separately, in a third estimate, the Central Bureau of Statistics said the economy surged 39.7 per cent in the third quarter of 2020 on an annual basis compared with the second quarter, reflecting an economy that was mostly open during the summer between lockdowns. The economy had contracted by 29.9 per cent in the second quarter.

Another slight contraction is expected in the fourth quarter owing to lockdowns, while exporters have said they are also suffering because of an appreciation of the shekel. The currency last week reached 3.11 against the dollar, its strongest in 24 years.

The Bank of Israel, which has been reluctant to lower short-term interest rates beyond its current 0.1 per cent rate on a view that rapid vaccinations will boost the economy, responded on Thursday with a pledge to buy $30 billion of foreign currency in 2021, up from $21 billion in 2020.

The shekel has since weakened to 3.27 against the dollar.

Growth in the July-September period was driven by sharp gains in exports (59.7 per cent), private spending (42.3 per cent) and investment in fixed assets (17.2 per cent).