The Impact of Coronavirus Crisis on the Israeli Economy - Dun & Bradstreet
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The Impact of  Coronavirus Crisis on the Israeli Economy by d&b

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The spread of coronavirus is affecting numerous industries, which experienced or have been experiencing material disruptions of their business activities.

The sectors which experienced the worst disruptions, and in fact still suffer from a stoppage in their operations, are the “First Wave” industries, which include airlines, hotels, restaurants, tourism sites and more.

Other industries, which are characterized by mass gatherings (“Second Wave”), also experienced material disruptions in their operations, and were forced to shut down during the months of March-April (except for online operations, if the business has any), including shopping malls, commercial centers and trading stores – in early May, when the government started to apply reliefs, these businesses were reopened.

Other industries that has been closed due to the gathering prohibition and are yet to be reopened, as of early May: banquette halls, event productions, theaters, cinemas, cultural events, swimming pools and more.

In this framework, during the second half of May and in June, a gradual re-opening of the businesses of some of the industries that are yet to re-open is expected, subject to various limiting guidelines, which concern the extent of allowed gathering and the level of disinfecting and hygiene. Thus, hotels are expected to reopen initially without gatherings in closed public spaces (such as the lobby and the dining room), cinemas, theaters and banquet halls are expected to reopen under a gathering limit (initially up to 50 persons).

Alongside the numerous industries that were harmed, some industries have been recording increased activities amidst the coronavirus crisis, including the retail chains, which recorded an increase of about 20% in sales in the month of March and of 11.5% in the first quarter, on a Year-over-year basis (source: The Central Bureau of Statistics). The increase in demand for food products and toiletries was translated into lower promotions – and the consumers were forced to pay higher prices for their stockpiling.

Another industry that experiences increase demand, on the back of the economic shutdown and the switch to teleworking, is the technology and services companies for teleworking solutions – companies that provide virtual management and communication infrastructures and enable business continuity for businesses also out-of-office, in order to enable continued services and minimize the disruption to the normal course of business where possible. Thus, numerous organizations have managed to generate outputs during lockdown through teleworking, including some traditional organizations which never imagined, before the crisis, that they would be able to operate on a teleworking basis.

We estimate that also nowadays, after most of the travel limitations on the economy were removed, organizations realize that they should be prepared for teleworking, and for maintaining their business continuity from everywhere through technological solutions, so that this trend is expected to continue.

Despite the increased activities in some of the industries, the aggregate business damage to the industries that were harmed by the crisis is far greater than the benefit to the industries that grew in it, to such an extreme extent that the latest outlook of the Bank of Israel (as of April 2020) is for a decline of 5.3% in the GDP in 2020 (before the crisis, a previous outlook was for a positive GDP growth of 2.9%).

Business Openings and Closures Data and Outlook for 2020

According to D&B’s data, over the past few years, about 55,000 businesses open annually in Israel while about 40,000-45,000 businesses close down annually. For example, in 2019, 56,500 businesses were opened while 45,500 were permanently closed.

We estimate that since the crisis started there has been a (temporary) decline of more than 70% in the rate of business openings. After a certain correction in the economy during the second half of 2020, we expect that the annual level would reflect a decline of about 1/3 in business opening compared to 2019.

The main cause for the expected decline in the opening of businesses in 2020 is the market uncertainty. Business owners find it very difficult to make business decision under uncertain conditions, when there isn’t any certainty concerning the expected revenues and cash flow management difficulties are expected. Thus, in light of the unemployment rate in the economy, the public’s purchasing power declines and negatively impacts the current feasibility of opening a business (due to the aforementioned negative impact on the businesses’ revenues and cash flows).

Furthermore, for the purpose of opening the business, business owners use their savings and financial support. However, on the back of the crisis, the public savings have diminished and the access to finance recorded a decline.

Concerning business closures, we expect 70,000 businesses and companies to close in 2020, an increase of some 50% compared to 2019, when about 45,000 businesses were closed. Correspondently, the probability for closing a business increased to over 11%, compared to about 7.5% in 2019.

In light of the data, 2020 is expected to be the first year in the past decade when the economy would shrink (i.e., there would be a negative net addition of business – the number of closed businesses would exceed the number of opened businesses). In total, the economy would shrink by 30,000 businesses (following a net increase of about 11,000 businesses in 2019), a decline of about 5% in the number of businesses in the economy.

Probability of Business Closure

Source: D&B; The 2020 data is estimated


An Increase in the Risk Levels of Industries across the Economy

 A spotlight on selected high-risk businesses:

The Fashion Industry: The fashion industry suffered from material disruptions in operations from mid-March to early-May, in light of economic limitations that led to closing of the shopping malls and shopping centers, and later also the high-street fashion stores. In late April, the open commercial centers and street stores have been opened, and in early May the shopping malls followed suit, after the large chains reached understanding vis-à-vis the government, under which a budget of up to NIS 6 billion (in addition to the NIS 80 billion budget that was allocated as finds for aiding the rehabilitation of the economy following the crisis), for the retention and returning of workers to the employment circle, including employees of the fashion industry.

However, the industry was considered to be a high-risk industry also before the coronavirus crisis, due to declining turnovers and the consequent increase in risk levels, in light of the competition from online shopping and the open sky policy. The percentage of closed businesses in the Fashion and Apparel Stores industry in 2019 was estimated to be about 13% of all of the active businesses in this industry. In 2019, in light of the industry’s trends, about 750 various stores were closed.

D&B estimates that the risk levels increased significantly, on the back of the coronavirus crisis.

We believe that the crisis would lead to a shrinking of the industry, with more than 1,000 fashion stores that are expected to become distressed and leave the industry in 2020, an increase of about 33% compared with the number of permanently closed stores in 2019.

Fashion Stores Closures

Source: D&B; The 2020 data is estimated


The Restaurants, Bars and Cafés Industry – was considered to be the riskiest industry in the economy as it is (before the coronavirus crisis) – according to D&B’s date, only about 60% of the industry’s opened businesses survive for more than 2 years, while 66% permanatly close or change a format within 5 years of establishment. The industry’s high risk level stems from the constant need for innovation, the existence of trends and transformations, low customer loyalty, high price sensitivity, a lack of managerial experience and knowledge for some of the business owners and more. Over the past few years, regulatory changes that exert upward pressure on the operational costs of business owners have been added to the aforementioned causes for the industry’s high level of risk.

Before the coronavirus crisis emerged, about 11,500 restaurants, food stalls and bars have been operating across Israel.

About 3,000-3,500 restaurants open annually while 2,500-3,000 restaurant permanently close.

We estimate that in the current year, which is clouded by the coronavirus crisis, there would be an increase of more than 40% in the number of closed businesses in the industry, so that in total more than 4,000 restaurants are expected to close during 2020. On the other hand, a decline in the number of opened new businesses in the industry is expected, so that the industry’s number of active businesses is expected to decline by 15-20%.

Restaurant Closures

Source: D&B; The 2020 data is estimated


The Construction Industry: The real estate sector is highly exposed to the effects of the coronavirus, despite the fact that is was excluded in early 2020 from the Emergency Ordinances by the government and defined as a vital industry where works can, presumably, continue regularly. From the supply side, the industry has been suffering since 22.03.2020 from a manpower shortage of 50,000 workers due to the lockdown in the territories of the Palestinian Authority. Thus, most of the workers who were staying in Israel returned to the Authority – out of a total of about 65,000 territory workers, less than 15,000 remained in Israel, as of early May. The current timing of the Ramadan (23/04-23/05) also contributes to the disruptions in the industry’s manpower, in spite of the National Security Council’s decision from late April to enable re-entry of construction workers form the Palestinian Authority to Israel. Alongside with the manpower shortage, there is also a shortage of construction inputs, both imported and locally produced, in a scope of 20-30%. Some of the products that are in shortage: Concrete products, aluminum products, ceramics products, internal design products, sanitation products and more. As a result of the manpower and materials shortages, according to the Israel Builders Association, the construction industry is currently at an output level of less than 50%, and therefore delays are expected in the deliveries of numerous projects. As of today, there is no recognition of coronavirus as a Force Majeure yet and discussions are held on this topic in government agencies. In addition, the economic uncertainties and the teleworking routine led to disruptions in the work of the Planning Administration – which slows the rate of plan approvals for new projects.

On the demand side, there is a decline in the number of purchased apartments due to the lack of employment certainty in the labor market (at the peak of the crisis, the unemployment rate reached a level of about 27%, compared to an unemployment rate of only 3.4% before the crisis), an increase in the interest rates of bank mortgages, and limitations on movement in the economy. In this context, the industry entered the crisis in a situation where demands exceed supply, and we can assume that in a while, demands would increase back. As a result of the industry trends, about 2,000 construction projects in Israel, mainly residential and some offices, has been put on hold due to finance difficulties. In addition, about 500 projects are currently out for sale with a discount of about 15% market price and even at loss prices, and the operations of hundreds of construction companies would be at risk over the past few months in case the credit conditions would not improve and no recogntiuon of the coronavirus as a Force Majeure would be achieved.

Construction Contractor that Entered Financial Default

Source: D&B; The 2020 data is estimated



The Growth Outlook for the Israeli Economy at the Shadow of the Coronavirus

The Bank of Israel 2020 Outlook (04/2020), following the coronavirus crisis, expects a decline of 5.3% in the GDP in the current year, with the economy returning to growth of 8.7% in 2021.

Before the coronavirus crises and taking its affects into account, the BOI Outlook was for a GDP growth of 2.9%, following growth of 3.3% in 2019.

We note that this outlook was formulated amidst the coronavirus crisis, and in light of the steps that have been taken globally for preventing the virus’ spread. This period is characterized by an extraordinary level of uncertainty – concerning the crisis’ duration, depth and medium and long term economic implications. Thus, a postponement in the process of removing limitations on certain industries, alongside with worse-than-expected shrinkage of the extent global trade, may lead to an even sharper decline of the GDP.

According to D&B’s estimates – due to the impact of the coronavirus on most of the businesses in the economy, about 70,000 businesses and companies are expected to close permanently in 2020, an increase of about 50% compared with 2019, when about 45,000 businesses were closed.

The survivability of businesses in the coronavirus crisis would depend on their financial resilience (with a variability between different businesses) and the financial strength of their respective industries (including the risk level and the level of exposure to the crisis). Businesses that lack financial resilience or operate in high-risk industries would find it difficult to manage their cash flows, up to potential cease of operations.

The Global Growth Outlook

According to BOI’s estimates (04/2020), the GDP of the developed economies would decline by about 6% in the current year, and is expected to grow by 5% in 2021. In addition, the imports of developed economies would shrink by 10% in 2020, but would return to a growth trajectory in 2021 with an expansion of about 8%.

This means that international trade is expected to decline by about 10% in 2020 compared to the previous year, which would increase the risk levels of Israeli exporters.

About אופיר שמואל View all posts by אופיר שמואל
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