2020: The ups and downs of Israel's economy amid COVID-19

A K-shaped recovery.

That may be the best way to summarize the economy’s performance during this crazy year.

It was a year where the economy was broken, unemployment was staggering and tourism was virtually nonexistent. It was also a year where stocks rose to dizzying new heights, tech companies flourished and previously unimaginable opportunities opened up.

When the world closed down in February and March, and US stock indices plunged as much as 34% in a matter of weeks, forecasters there debated whether the recovery would be V-shaped, meaning a fast return to normal, or U-shaped, indicating a longer healing period would be needed. By late summer, the lines on the graphs had clearly diverged, and pointed sharply up and down like a K, with the rich getting richer and the poor getting poorer.

The pandemic turned the world upside-down. People working in the tourism, restaurant, fitness and entertainment industries got hit the hardest, as repeated lockdowns and quarantines made their work nearly impossible. Unskilled workers, millennials and people with “in-person” jobs were in worse shape than those that could work online from home. And women tended to fare worse than men, as the burdens of childcare and domestic duties sent their workforce participation backward by decades.

Unemployment spiked to unheard-of levels. A year ago, at the end of 2019, Israel’s official unemployment rate was a record-low 3.4%. By mid-May, at the peak of Israel’s first lockdown, that rate had ballooned to an astonishing 26.6%, and it reached 22.7% during the height of the second lockdown in October. More than a million people were listed as looking for work in October, in a country of just 9.2 million people.

According to the National Insurance Institute, 42,500 households have fallen below the poverty line during the pandemic, of which 20% fell from the middle class. Another 110,000 are considered to be at risk of poverty. The middle class and self-employed were the hardest hit.

FAMILIES SHIFTED their spending toward increased consumption of food, furniture, electronics and insurance. (Photo credit: Yaakov Naumi/Flash90)

Families were shocked at how quickly their comfortable lifestyles crumbled. Yoni (not his real name) was running a successful pet store in Jerusalem before the pandemic.

“We were looking into expanding the business when the lockdowns started,” he said. “I was out less than a month later and my wife also lost her job, so we had to move into an apartment half the size to save money on rent. We’re currently scraping by on pita and macaroni and cheese to save enough money to fly back to the US, where we have more family and support. It has been really hard to make it under these conditions.”

Analysts at Dun & Bradstreet estimate that nearly 80,000 businesses closed in the Jewish state in 2020, with 60,000 more shutting next year. Those numbers are 70% higher than 2019 closures, with the restaurant, construction and transportation sectors taking the biggest hit.

Some worry that the challenges of the current crisis will continue even longer than the pandemic itself.

“I’m living off my savings at this point,” said M., a computer programmer in his 60s. “I haven’t had steady work in months. I’ve had a few small projects here and there, but nothing that pays the rent. I’m trying to retrain so that I can find a job when things go back to normal, but not many people are going to hire me instead of someone in their 20s.”

Government grants for small businesses and unemployment benefits have been helpful, but they are generally perceived as woefully insufficient. The long-term costs of all of the state’s emergency interventions is still unknown to the Israeli taxpayer, but the fiscal deficit more than tripled over the course of the year to 10.1% of GDP at the end of October. As Israel heads to new elections in March 2021 and with no state budget, it remains to be seen what time bombs are ticking underneath the workings of the economy.

WHILE HUNDREDS OF THOUSANDS of people suffered, many working in hi-tech survived 2020 unscathed, and many companies found new growth opportunities as the world rapidly moved online.

Stocks had a pretty good year. As the world woke up to the coronavirus and started locking down in the middle of February, global stock markets plunged with unprecedented speed. The benchmark Dow Jones Industrial Index dropped by a record 23 percent for the first quarter of the year, and it looked to many like the world was quickly descending into a new great depression. But after hitting bottom in the last week of March, markets started rising almost as quickly as they fell. By August, the Dow and S&P 500 were back up to their pre-pandemic levels, and they quickly broke through those to new record highs. In the end, the S&P returned 13% and the Dow and Nasdaq rose 43% for the year, and a whopping 64% and 83% from their lowest points in March, respectively. Not bad for a global economic crisis.

In fact, if you didn’t lose your job in 2020, it was probably a pretty good year for you, at least in economic terms. And that was complicated for some. Speaking with several business owners who did well this year, we noticed a sort of a “survivor’s guilt” as they spoke about their success as they watched their friends struggle. Most preferred to be quoted anonymously, for fear of arousing jealousy or an “evil eye.”

“When lockdowns began in March almost all of my clients reacted as the world did,” said the owner of a Jerusalem-area Internet marketing firm, who asked not to be named. “Many of them paused active campaigns in order to brace for the unknown. Some needed to lay off staff to cover basic expenses, some had inventory while their largest wholesale buyers canceled huge orders. Then, the world adapted to lockdown and millions of dollars shifted to eCommerce purchases. The brands that kept running ads through the months of May, June and July saw massive returns like they had never seen before.

“One client made more money in July and August of this year than they made in all of 2019. Another made more in June alone than all of 2018-2019. With results like these they began to scale spending. My business lost 50% its revenue in March, but we are now generating 50% more revenue than before the pandemic began.”

Others benefitted from the chaos of the situation.

“The truth is that 2020 was our best year ever and we even had to expand our staff,” said a family lawyer. “Unfortunately, our main growth was in divorces. Being stuck at home with each other during a seger (closure) does not do good for marriages that are otherwise less than stable. More clients also came to create wills and continuing powers of attorney when the pandemic forced them to confront their mortality.”

CONSUMER HABITS changed dramatically during the year as people locked down at home.

Families in Israel cancelled vacations and spent less on leisure activities and clothing in 2020, but shifted their spending toward increased consumption of food, furniture, electronics and insurance. Shufersal, Israel’s largest supermarket chain, said that revenues for the third quarter rose by 14% compared to the previous year, with nearly all of that attributable to the effects of the closures. Other grocers reported similar growth.

‘BLACK-SWAN event’: Empty departure halls at Ben-Gurion Airport, October. (Photo credit: Olivier Fitoussi/Flash90)

The travel industry suffered the worst, with flights essentially off-limits for most people throughout the year. The year for travel agents was “a once-in-a-century disaster, horrendous, a black-swan event that no one could have prepared for,” said Mark Feldman, CEO of Jerusalem’s ZionTours travel agency. “It’s important to understand that businesses have fixed costs that need to be paid, regardless of how many customers you serve. That’s why most airlines and travel agencies have given vouchers, not cash refunds, for cancelled flights. Everyone is just trying to stay afloat.”

Nationwide lockdowns also meant a big shift to online shopping, which was sometimes the only way to get groceries and goods. For years, local e-commerce had languished in Israel due to poor postal service, and Amazon’s decision last November to offer free shipping to Israel set off nothing less than a consumer revolution. Amazon was able to sell thousands of products more inexpensively than local stores and overnight, Israelis started shopping online and stopped purchasing clothing, toys and household items in stores. A year ago, we might have expected that this would be the big story of 2020.

THE MOVE to online shopping isn’t going away, most experts agree. (Photo credit: Pixaby)

But by the time Amazon was forced to cancel deliveries to Israel in March due to pandemic uncertainty, online shopping had turned a corner, and lockdown made it a necessity. Stores that expanded online quickly and decisively often discovered a world more lucrative than their bricks-and-mortar shops ever were. Credit card processing company CAL said in September that online shopping on Israeli websites rose an average of 10% during the pandemic, while purchases from overseas websites dropped an average of 37% from a year earlier. Shufersal noted that online sales of groceries now make up some 21% of its total sales, compared to about 15% in 2019. Most experts agree that, regardless of how long it is until the pandemic is over, the move to online shopping isn’t going away.

WHAT OF the Start-Up Nation and Israel’s venerable hi-tech ecosystem? For many companies, coronavirus brought a world of new opportunities.

Israeli IPOs and acquisition deals of technology firms soared to a whopping $15.4 billion in 2020, according to PwC Israel. That was 55% higher than the previous record, 2019’s $9.9b.

No fewer than 19 overseas IPOs took place this year, led by JFrog’s $3.9 billion IPO and Lemonade’s $1.6 billion offering. There were at least six acquisitions worth more than $500 million in 2020, led by the $1.1 billion acquisition of cybersecurity firm Checkmarx in April, the $1.1 billion purchase of IoT security firm Armis in February, and Intel’s acquisition of Moovit for $900 million in May.

On the venture capital side, the IVC research center said that 2020 saw 578 deals made at a total investment of $9.9 billion, breaking records set for Israel in 2019.

Even the Tel Aviv Stock Exchange reported a positive year, with a 43% increase in daily trading volume and 27 IPOs, its highest since 2007. The Israeli market’s trading results were mixed, however. The TA Tech-Elite and TA-Technology indices rose 35% and 31%, respectively, while the benchmark TA-35 and the Tel Aviv Real Estate indices declined 15.4% and 12.5%.

What’s pushing stock prices so high?

“At the end of the day, the reason stocks continue to rise is because of monetary policy,” explained Victor Behar, director of Bank Hapoalim’s economic department. “Money needs a place to be parked, and as long as interest rates are close to zero, any place you put your money is going to lose value due to inflation except in the stock market. For that reason, regardless of anything else, stocks will probably keep going up in 2021.”

The pandemic didn’t slow down the Start-Up Nation, and may have helped accelerate its growth.

“Physical location is becoming less of an issue for investors, and most of our money already comes from abroad,” global equity crowdfunding platform OurCrowd founder Jon Medved told us earlier this year. “So Israel benefits a lot from the nature of digital connectivity shrinking the world and the fact that we are virtuosos at these digital skills that we’ve mastered.”

WHAT DOES 2021 hold in store? There is hope that the new coronavirus vaccine will cause the pandemic to start tapering off in the coming months, but meanwhile, the virus continues to spread out of control around the world. Israel has a massive unemployment problem, no government, no budget and an unprecedented government deficit, but the tech environment is strong, and the peace deals with Arab countries in the region are opening new business opportunities.

The UN expects poor countries around the world to face worse extreme poverty and hunger than we have seen in decades, but stock markets in developed countries are forecast to continue growing rapidly.

Expect that K-shaped graph to continue reaching higher at the top and sinking lower at the bottom. 