Hello to all those watching the conference-I am pleased to be here today taking part in this important professional discussion, which the Eli Hurvitz conference provides each year.
The past year was characterized by a health crisis that led to an economic crisis of historic proportions, one that crossed borders and continents. The lockdowns imposed in response to the broad outbreak of infection led to a sharp decline in economic activity. We are pleased that the recovery from the second lockdown has been more rapid than the recovery from the first one, and thus it may be concluded that it is important to continue and open the economy and to maximize economic activity, but in a responsible manner.
The crisis also caused a strong negative impact on the labor market-an impact that included all population levels and geographic areas. The government’s role in the handling of and exit from the crisis is extensive and incredibly important, and hence there is great importance to the 2021 budget, which is the economic work plan of the government. I will expand on the importance further on in my remarks. Monetary policy has also had an important role in the crisis so far, and through it the Bank of Israel worked in a range of ways to minimize as much as possible the negative impact on Israel’s economy, and we are working all the time on steps and programs that will lead the economy back to a path of growth, employment and productivity, through utilizing the opportunities inherent in the crisis.
I will begin with a short survey of the Israeli economy as it headed into the crisis.
It should be recalled that Israel entered the crisis in a relatively good state: solid growth, a tight labor market, a current account surplus, and a debt to GDP ratio that had declined to approximately 60 percent, due as well to the responsible budgetary conduct by Israeli governments in most years-a fact I’ve defined in the past as a strategic asset.
Israel was adversely impacted by the crisis relatively less than other economies worldwide. The outbreak of the crisis and the imposing of limitations led to a negative economic impact, but compared internationally the adverse impact to GDP was lower. The data throughout the summer were better than we had thought, and show that there should be a continuation of a policy to minimize the adverse impact on businesses that drive growth and employment, and to open the economy in a responsible manner alongside maintaining low morbidity.
We are seeing that the adverse impact from the second lockdown to date has been lower than the first lockdown, and the economic recovery from it has been relatively rapid.
The Bank of Israel Research Department presents a forecast with two macroeconomic scenarios, depending on the development of the infection rate in Israel. These were built based on information that we had in October. One scenario is the “control scenario”, which includes the second lockdown with exit paths as we currently see them-gradually, without further significant limitations through the second quarter of 2021.
The “low control” scenario refers to a longer and more severe lockdown as well as additional waves of morbidity around December–January and even another around March. The gap between the scenarios is very wide, with the differences between the two scenarios mostly being reflected in 2021.
In order to understand the meaning of the control scenario relative to the point we should have been if not for the coronavirus, under the control scenario there is a GDP gap of 5 percent and under the low control scenario the gap is almost 10 percent. These are tremendous differences-GDP of billions of shekels that is not being achieved by the Israeli economy.
Obviously, we also have some good news-not only regarding third quarter activity but also the expected arrival of the vaccine. However, we have to understand that even with the vaccine and if everything occurs as it should, we will be with the coronavirus until at least the end of the first quarter of 2021, if not into the second quarter of 2021. Therefore, the two scenarios in the forecast are still relevant.
When we examine the forecasts regarding unemployment and the labor market, we can see evidence that the labor market will take quite some time to return to its strength, and that is also when the economy will recover. Unemployment rates are very high. In the low control scenario, the broad unemployment rate is liable to…