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The product may not have dropped - but you should wait with the champagne
Contrary to forecasts, GDP fell at a relatively moderate rate last year.
Avichai Snir mentions that despite the positive figure, there are 4 other factors that somewhat ruin the celebration - and one more factor that actually leaves room for optimism.
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Corona
Standard of Living
product
Avichai Snir
Friday, 19 February 2021, 01:41
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Bottom line, GDP fell by just 2.4 percent in 2020.
This is much better than the early predictions, and it's definitely good news;
In terms of GDP, the Israeli economy is among the least affected by the corona.
But before the politicians begin the celebration, it is worth paying attention to the small details.
There are some unpleasant lines, but also some that give reason for optimism (caution).
First, GDP may have fallen by 2.4 percent, but what is most important to each of us personally is private consumption, and it has fallen by 11.1 percent per capita.
That is, on average, each of us consumed 11 percent less.
Therefore, the product may not have dropped much, but our standard of living, at least as far as the material standard of living is concerned, has dropped in droves.
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Second, investment in fixed assets fell by 4.8 percent.
A large part of the decline is due to a decline in construction starts.
There are no final figures for 2020 yet, but construction starts in 2020 appear to be at least 15 percent lower than in 2019.
This explains why housing prices in 2020 rose by four percent, despite the corona.
Given that even in 2019 the number of construction starts was not particularly high, it is likely that housing prices are going to rise even more in the coming year, unless we go through another recession, and one that will be more difficult than the current one.
Imports are small
Assuming that the vaccines will regulate for us at least a period of almost normal life, we are going to see a period in which demand is going to increase significantly
Third, compared to investment and private consumption, what actually increased government expenditure.
That's fine - government spending is expected to increase during a recession.
But there is something misleading about this when it comes to government spending increasing GDP.
In national accounting, the government's contribution to GDP is calculated as the total government expenditure on wages.
But the fact that the government increased its spending on wages precisely at a time when a large proportion of workers worked from home or did not work at all does not exactly mean that GDP increased.
On the other hand, I have some friends (civil servants, by the way) who claim that the fact that civil servants worked less is actually very positive - in their opinion, there are some civil servants who do not do much anyway, and when they are at home they do less damage.
Fourth, another thing that contributed to the increase in GDP is a decrease of about eight percent in imports.
In national accounting, imports come in a negative sign, because what you buy from abroad is not produced in the country. But for consumers, import is the most positive thing there is, because imports are all the products we buy from abroad plus the trips we make abroad. It may be positive for GDP, but it is very negative for the standard of living.
Fifth, I will end with the good news. The corona has hurt people's incomes in a very unequal way. A very large part of the population has not been harmed, or almost never harmed. Assuming that vaccines will provide us with at least a period of near-normal life, we are going to see a period when demand is going to increase significantly.
Therefore, we will see a period of high demand, some price increases, and politicians announcing that everything is due to them.
Dr. Avichai Snir - Netanya Academy and Bar-Ilan University
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