Following an improvement in the health situation, lockdowns were eased in Q1 2021 and the Palestinian economy started showing signs of recovery. The recovery was interrupted in Gaza by an 11-day conflict in May while the West Bank continued its upward trajectory. Despite strong revenues, the fiscal situation remained difficult in 2021 due to high public spending and very low aid. Given the start of a fourth COVID-19 wave, the outlook remains precarious and subject to additional political and security risks.
The Palestinian Authority (PA) took a decision to significantly ease lockdowns in January and February 2021, following a decline in the daily number of new COVID-19 cases. The ease in lockdowns combined with the launch of the vaccination campaign allowed business activity to gradually rebound. Real GDP of the Palestinian economy grew by 1.9% in Q1 2021, compared to the previous quarter. However, comparing the economic performance in Q1 2021 to the same quarter in 2020 results in a contraction of 5.9%, indicating that the economy has not yet rebounded to its pre-COVID levels. Even though GDP figures for Q2 2021 are not available yet, business cycle indicators suggest that the West Bank economy continued on an upward trajectory while the recovery in Gaza was short lived due to the 11-day conflict in May 2021, which resulted in the destruction of about 2% of Gaza¡¯s capital stock.
If the pace of the reconstruction process in Gaza remains slow, the Strip¡¯s economy is expected to shrink in 2021 due to the lingering effect of the conflict. The West Bank¡¯s performance, however, is expected to be more positive, especially if the vaccination campaign continues and the lockdown measures continue to be relaxed for most of the remainder of the year. We project a growth rate of 2.9% for the Palestinian economy in 2021, implying a near stagnation in real per capita income and worsening social conditions, especially in Gaza. However, if some of the confidence-building measures that have recently been discussed between the PA and the Government of Israel (GoI) materialize, including easing the movement of goods and people in and out of Gaza, and increasing the number of Palestinian workers in Israel, growth could further strengthen, as would living standards.