Israel's Macroeconomic Challenges in the Post-COVID World

“Two challenges hover above the rest – a stock market bubble and inflation”

(Jerusalem, June 29, 2021) Speaking at the Eli Hurvitz Conference on Economy and Society on challenges in a post Covid world, Yohanan Plesner, President of the Israel Democracy Institute opened by the panel by noting that: “While we are at a moment of potential hope, the challenges facing Israel are great. We are still dealing with the fallout from Covid, especially as Israel is now beginning to contend with the Delta Variant…. After two-and-a-half years without one, Israel’s new government must move quickly to pass one reflecting the new post-pandemic priorities. More broadly, they have to demonstrate that Israel’s democracy can still deliver after years of instability, stagnation and paralysis.

Paul Singer, Founder, President, Co-Chief Executive Officer, and Co-Chief Investment Officer of Elliott Investment Management L.P. said that “There are two large challenges that hover above the rest: the policy response to COVID, built on top of the policy response to the global financial crisis of 2008-9, has created a unique situation in financial markets. There is a stock market boom or bubble, that on many metrics, close to all metrics, is the most expensive, the most highly valued stock market in history, exceeding 1929 levels of speculation, un-informed speculation leveraged margin, comparable to and in some ways exceeding 1997 to 2000 levels of stock prices, compared to any valuation metrics.”

The second challenge Paul added is inflation. “Coming into the COVID crisis, there was an unsound policy landscape, and of course we know that every part of the 2009 playbook was doubled down on, quadrupled down on, by the post-pandemic playbook. So what you have today is this extraordinary set of policies, which has lit up, among other things, and for among other reasons, an actual inflation, which was said to be so hard to generate, and secular stagnation, was supposed to be the outcome for the developed world going forward. What you have now is levels of inflation which exceed by a lot, the expected levels of inflation.”

“So what the Fed and other central banks are messaging now is that this inflation is transitory…. It may that it turns out that it is transitory or temporary, but I think it doesn’t take too much study to realize that the central banks, as they have for quite a while, are way over their skis, in assessing either on a theoretical or empirical basis, how the economy, the financial system, markets and now inflation is going to go.”

Singer concluded: “I am optimistic that there are a set of policies, and how Israel can utilize them, but my main point is that I think the major developed countries, are headed for big trouble… inflation and a stock market crash… a global stock market crash, which is the playbook, will be a big challenge for Israel, on top of the challenges mentioned by Prof. Flug.”

Prof. Karnit Flug, IDI's Vice President for Research and William Davidson Senior Fellow for Economic Policy, said: “I think that I am quite optimistic about the pace of the recovery, we actually see indication of strong growth. We see repeated upward revision to growth projections for Israel and globally, and I think this is an unprecedented reaction from a very low point to a very strong recovery. I am concerned about the labor market, and I think generally, although we have seen recovery in employment, there are some parts that stay behind, and not everyone will benefit the same extent from the recovery. We should say the pandemic caused a very strong blow to people with low skills, where high skilled people enjoyed continued demand and increase in wages. So it actually expanded very much the social gaps, and that may remain with us.”

“Regarding inflation I think that what we see for now, at least in Israel, could be a transitory increase in prices…there are reasons to think that it may be transitory, because there were some problems in the supply chain, that could be temporary, increase in price of shipments. There is a very strong reaction, an increase in consumption, as a result of unplanned savings for a large part of the population, so it could be temporary, however I think the challenge for policy makers is to identify early enough, if what seems to be temporary pressures, turn into an accelerated inflationary pressure, and really react on time. It is a big challenge for policy makers.”

As for recommendations to the new government post-corona Prof. Flug said: “the government will have to tackle all the challenges that were here before Corona along with the challenges that are the result of the crisis. One thing that is an advantage of the new government is that it has declared that it will deal with matters that are important to Israeli society, and are not divided along ideological or political lines. The policies in the economic arena are not really divided along these lines and there is a good chance that they will adopt them.”

“The old challenges included the low and slow rising productivity in the non-hi-tech sector that employs 90% of Israeli workers. Related to that are large economic social gaps, large structural deficit and insufficient public services. New challenges include issues in the labor market, mismatch of skills, accentuated by the crisis. So far we haven’t used the crisis to upgrade employee skills. Now there has to be significant investment in infrastructure…improving investment in human capital… and finally streamlining our very heavy burden of regulation and bureaucracy.”

The Eli Hurvitz Conference on Economy and Society—formerly the Caesarea Economic Policy Planning Forum—is widely recognized as Israel's most influential economic conference. For 28 years, the Conference has served as a crossroads where public discourse and professional knowledge in economics and society meet, with the aim of improving the decision-making processes in the administration and improving the quality of Israel's social and economic policy for the benefit of the entire public. This year, the Conference will focus on formulating a long-term vision for the Israeli economy and policy measures to lead the economy from recession to growth in collaboration with senior figures from the public, business and civic sectors.

A series of team-led research and policy recommendations on issues closely related to the conference sessions will be presented during the conference on June 29-30, at the Orient Hotel in Jerusalem and online on IDI's website.