From Lockdown to Breakout or Breakdown

In the Times of London today, London heading for a lockdown with calls for a national lockdown.

How are businesses going to survive, how many people have lost their jobs and how will people be able to finish the month?  The same issues unfolding across the world. People are genuinely worried about their jobs or lack of one, and their ability to pay their bills.

In 2020 when the pandemic struck, in synchronization across the globe, the world economy took its biggest shock since WW2. Lockdowns, closing of borders, businesses, factories and shops, led to the loss of some 500 million jobs worldwide. The predicted fall in GDP was around 5% and has so far been around 8%. In comparison, the world economy following the financial crash in 2007 fell only 0.1%.

And this is where we need to take a fine balancing line, between life and death, protecting the vulnerable and less vulnerable catching the virus, and the economy, allowing people to make a living to survive.

The global financial crisis of 2007-2008 saw the end of traditional economic policies and the introduction of some less than traditional ones, to stabilize the financial markets and revive the economy.  This was the worst economic recession since the Great Depression. Interest rates were reduced to around zero. In order to stimulate their economies, governments introduced quantitative easing (QE). Although these measures did mitigate some of the economic problems, there are questions on whether banks were prepared to and actually lent the sums to borrowers to invest and spend in the local economy.

Interest rates since the Global Financial Crisis have stabilized and remained at a low level, as the economies have struggled to recover to their pre-crisis levels.

So, what is the plan? Good question! And looking at the response not only in Israel but across the western world, there doesn’t appear to be one.  All countries have used various stimuli packages in billions of USD to keep their economies going. This has been combined with other programs to help businesses and workers.  But with businesses closed during lockdowns we are not really seeing the benefit of these measures.

  • Grants to help cover costs only allows them to “tread water”, just;
  • Loans will need to be repaid at some stage in the future;
  • Postponement of taxes and rates is just a postponement.

Business confidence has fallen to one of the lowest levels that we have known.

Approximately 50% of the US GDP comes from SME’s (small and medium sized businesses) and in the UK over 99% of businesses are in this SME category. Data issued by the Israeli Ministry of Economics and Industry show similar figures.

What is happening in the economy?

In larger companies there tends to be more employees than actually needed to do the work. After putting many employees on holiday without pay, it is clear that companies will not take back all their staff at the end of the lockdown. The new office, adapted to the times of the pandemic, cannot take the same level of staffing as before. Companies will, if they have not already, select those employees to come back to the office, and those that they will let go.

The “downsizing” of office staff will cause a ripple effect through to the smaller businesses that service them, from cleaning and maintenance, canteen services, delivery services\taxis, consultancy, and sub-contractors. And more importantly, do they need all the office space they have today?

And the shops? As more shopping is done on-line and less people physically visiting them, will the chains need to keep the number of shops they have in any specific area. The economic viability of each shop will be considered and there will be consolidation as they cut costs.

With new offices and malls coming onto the market, building work continues across Israel, and with businesses looking to reduce their space, the outlook for the commercial property market must be grim.

The housing market has kept up, and signs around the world have shown prices have not fallen. There are still buyers out there paying the price, but the government scheme with the banks, freezing mortgage and personal loan repayments, could be a ticking time bomb.

And then we will need to talk about bank stability.

This leaves us with two issues, getting the economy back working, and making the structural changes necessary for a sustainable economy under the “new normal”.

Getting Israel back to work – building the new normal

Large companies have continuity planning that enable them to carry on working and survive, however given the size of the SME market and its importance to the economy the SME needs to be able to work. Not just that, with people being forced onto the job market, it is the SME that can not only provide employment opportunities, but let people start their own new business.

It is clear that businesses must be allowed to operate and this is now going to happen. The ability to work, to earn a living, is critical not just for the economy but also for the well-being of the individual and their family.

We must also have the plan and process to prevent us from going back into another lockdown cycle.

The traffic light approach is similar to what other countries have implemented successfully. New Zealand has a 4 level system. Only in Level 4 – Lockdown are all but essential business closed, unless working at home is possible.  See https://covid19.govt.nz/alert-system/about-the-alert-system/.

The major issue in Israel is its size and workers living in a red town but working outside of it, even essential workers such as supermarket and hospital staff. This is how the virus can spread out of the red area and flare up elsewhere. Lockdowns need to be lockdowns, properly controlled, specifically local ones, with all the logistical issues they will cause.

There should be no limits on who is tested. If we need to have people working, they also need to be tested periodically to ensure that they do not go to work with the virus. Limits on testing hides asymptomatic super spreaders from creating new breakouts of the virus.

Where people are unable to work, restrictions on specific activities, those living in red towns, those self-isolating or those classed as high-risk due to medical issues or age, the government must step in and provide financial assistance through Bituach Leumi.

Building for the future

Change literally happened overnight, and how we behave in the new normal, requires a change not just in our behaviour but also in our mindset. This has to start at the top with the Government and its policies. A recent OECD report on how Israel is coping with the effect of Covid19 identifies a number of structural reforms necessary for us to manage better and create a better future.

The main reform recommended relates to education. The digital age has become critical to survive in the new world and this has to be emphasized now throughout the education system so that those leaving school will have the necessary tools to cope. More than that, those already in the workplace, unemployed or in semi-skilled, non-digital jobs should be given retraining opportunities that will give them the required skills to survive. The report emphasizes the need in the Arab and Haredi sectors to narrow the gap with the rest of Israel, and give those workers the vocational skills necessary for the new normal.

Digital transformation is key, and although businesses are going to have to adapt, if they haven’t already started, both the government and local authorities can help with this. It is more difficult for the smaller local business or shop to make the change. A local authority can provide the platform and services for small businesses to go on-line and accept on-line purchases for delivery or collection in-store.  Courses in the use of computers for the senior citizens can be expanded to all residents that need help using major local companies giving back to the community. And what about free Wifi, an essential!

Israel has spent billions on the various short term assistance and increased funding to the Health Ministry. This not only needs to continue, but will also need to be paid for at some stage. For a number of years tax authorities have spoken about getting internet companies and global on-line service providers like Amazon, Google and Facebook, to pay their fair share of taxes based on the activity they have in Israel and other countries.  It is these companies who are benefitting from all the changes and reporting increased revenues and profits.

Time to act now.

About the Author
Ian Grant, a UK and Israeli accountant, in Israel for over 30 years, provided consultancy services to some of Israel's largest companies. Currently helping start-up companies build their finance function. Using cloud software, Ian has partnered with a UK company, Aqilla providing multi-lingual, multi-company and multi-currency business solutions for the new today. Married with seven children, 5th generation Israeli, and six grandchildren. A family that took a significant part in the creation and building of this country.
Related Topics
Related Posts
Comments