Abstract
This document presents the macroeconomic staff forecast formulated by the Bank of Israel Research Department in August 2020[1] concerning the main macroeconomic variables—GDP, inflation, and the interest rate. The forecast includes two main scenarios that reflect the boundaries between the realization of an optimistic scenario and the realization of a pessimistic scenario. In the optimistic scenario, the assumption is that control is achieved over the morbidity level, such that there are no additional significant restrictions beyond the current ones. In the pessimistic scenario, the assumption is that control over the morbidity level is low, such that economic activity moderates as a result of additional restrictions (to the point of a formal lockdown) or through the public’s voluntary avoidance of activity in view of worsening morbidity data. The pessimistic scenario also includes a second morbidity wave abroad.[2]
In the optimistic scenario, we assume that Israel will return to a path of expanding economic activity starting in September, such that by the end of the year, the level of economic inactivity will decline and stabilize at about 7–8 percent, which will be maintained until a vaccine is found. In the pessimistic scenario, we assume that Israel will experience waves of morbidity that will lead to reduced economic activity every few months until a vaccine is found. As a working assumption only, in both scenarios, finding a vaccine will begin to affect the economy in the second half of 2021, when the economy will begin to recover and gradually converge toward the potential activity level.
In the optimistic scenario, GDP is expected to contract by 4.5 percent in 2020. Bringing the pandemic under control will enable a higher level of economic activity, such that in 2021, growth is expected to be relatively high—about 6.0 percent, but the average level of activity will remain about 5 percent lower than the pre-crisis trend. The inflation rate in the coming four quarters is expected to be 0 percent, and in 2021 it is expected to be 0.4 percent. The broad unemployment rate[3] among those aged 15 and up (hereinafter “the unemployment rate”) is expected to be 11.6 percent at the end of 2020, and to decline to 7.7 percent at the end of 2021, compared with 10.5 percent and 6.6 percent, respectively, in the July forecast.
In the pessimistic scenario, GDP is expected to contract by 7 percent in 2020, and to grow by just 3 percent next year, so that the average level of activity will be about 10 percent lower than the trend prior to the crisis. The inflation rate in the coming four quarters is expected to be -0.6 percent, and 0.9 percent in 2021. The broad unemployment rate is expected to increase to 13.6 percent at the end of 2020, and to decline to 12.1 percent at the end of 2021.
In both scenarios, the Research Department’s assessment is that the interest rate in one year is expected to be within the range of 0–0.1 percent, similar to the forecast from the beginning of July, but the Bank of Israel may expand or accelerate the use of existing or additional monetary tools, including the interest rate, in accordance with developments.
[1] The forecast was initially presented to the Monetary Committee on August 12, 2020, prior to the interest rate decision reached on August 24, 2020.
[2] These scenarios reflect a reasonable, but not absolute, range of the seriousness of the economic damage resulting from the COVID crisis. There are certainly more pessimistic scenarios (sliding into serious closures as in the past, undermining financial stability, a continuation of the crisis resulting from the failure to find a vaccine, and more), as well as more optimistic scenarios (finding a vaccine sooner, an economy that can cross the 7–8 percent nonactivity threshold during the COVID crisis, a very rapid recovery after the crisis, and more).
[3] The broad unemployment rate relates to those who are unemployed under the ordinary definition (those who have not worked, wanted to work, were available to work, and looked for work), employed people who were temporarily absent for an entire week for reasons having to do with COVID (including those on unpaid leave, public service workers on forced vacation, and the self-employed who did not work), and a surplus decline in the labor force (a decline in the participation rate that is beyond the trend).