Recession Looms in Israel as Central Bank Acts to Combat Coronavirus Impact

Israel is probably headed for a recession despite action announced by the central bank on Sunday to fend off the economic damage from the coronavirus, economists said.

A day after the government shuttered shopping malls and restaurants, the Bank of Israel announced quantitative measures such as buying government bonds for the first time since 2009, but it stopped short of lowering interest rates.

Jonathan Katz, chief economist at Leader Capital Markets, said he foresees a contraction of as much as 3% this year, with the closures to business costing the economy up to 500 million shekels ($136 million) a day.

“You’re basically looking at a weak first quarter … highly negative in the second quarter and still negative in the third quarter, and then maybe a gradual recovery in the fourth quarter.”

With 200 confirmed cases of coronavirus in Israel, Prime Minister Binyamin Netanyahu’s government said that malls, hotels, restaurants and other places of entertainment would shut. Pharmacies, supermarkets and banks would stay open.

These follow earlier restrictions, including shutting schools and requiring anyone entering the country to self-isolate for two weeks. Many airlines have halted flights to Israel while flag carrier El Al has slashed its schedule.

The shekel has weakened 7% against the dollar since mid-February. Stocks were up more than 2% on Sunday following a U.S. market rally on Friday.

Israel’s economy grew 3.5% in 2019.

The benchmark interest rate stands at 0.25% and economists believe there’s a good chance of a cut at the central bank’s April 6 meeting, or even before.

The government’s hands have been tied over fiscal policy due to a year-long political stalemate, making it tough to tackle a high budget deficit or spend to prop up the economy. It has pledged 8 billion shekels in loan guarantees to businesses.

Leader Capital’s Katz said that this was insufficient and direct payments to companies were needed.

Michael Sarel, head of the Kohelet Economic Policy Forum, said Israel should transfer resources from elsewhere in the budget and warned against increasing the deficit.

Sarel, a former Finance Ministry chief economist, said the deficit is starting at around 4% of gross domestic product and is liable to swell given higher spending and lower growth.

Noting that the central bank’s announcement it would buy government bonds did not provide numbers, Katz said it should buy corporate bonds as well.

“I see this as too little too late,” he said.