Global economy faces a tightrope walk to recovery: OECD
The COVID-19 pandemic has triggered the most severe recession in nearly a century and is causing enormous damage to people’s health, jobs and well-being, according to the OECD’s latest Economic Outlook. The OECD report says government support to help people and business in the hard-hit sectors will need to evolve but to remain substantial.
With little prospect of a vaccine becoming widely available this year, and faced with unprecedented uncertainty, the OECD has taken the unusual step of presenting two equally likely scenarios – one in which the virus is brought under control, and one in which a second global outbreak hits before the end of 2020.
If a second outbreak occurs triggering a return to lockdowns, world economic output is forecast to plummet 7.6 per cent this year, before climbing back 2.8 per cent in 2021. At its peak, unemployment in the OECD economies would be more than double the rate prior to the outbreaks, with little recovery in jobs next year.
If a second wave of infections is avoided, global economic activity is expected to fall by 6 per cent in 2020 and OECD unemployment to climb to 9.2 per cent from 5.4 per cent in 2019.
The economic impact of strict and relatively lengthy lockdowns in Europe will be particularly harsh. Euro area GDP is expected to plunge by 11.5 per cent this year if a second wave breaks out, and by over 9 per cent even if a second hit is avoided, while GDP in the United States will take a hit of 8.5 per cent and 7.3 per cent respectively, and Japan 7.3 per cent and 6 per cent.
Emerging economies such as Brazil, Russia and South Africa, meanwhile, face particular challenges of strained health systems, adding to the difficulties caused by a collapse in commodity prices, and their economies plunging by 9.1 per cent, 10 per cent, and 8.2 per cent respectively in case of a double hit scenario, and 7.4 per cent, 8 per cent and 7.5 per cent in case of a single hit.
China’s and India’s GDPs will be relatively less affected, with a decrease of 3.7 per cent and 7.3 per cent respectively in case of a double hit and 2.6 per cent and 3.7 per cent in case of a single hit.
In both scenarios, the recovery, after an initial, rapid resumption of activity, will take a long time to bring output back to pre-pandemic levels, and the crisis will leave long-lasting scars—a fall in living standards, high unemployment and weak investment. Job losses in the most affected sectors, such as tourism, hospitality and entertainment, will particularly hit low-skilled, young, and informal workers.
Speaking ahead of a special OECD Roundtable Ministerial Meeting chaired by Spain’s Vice-President of the Government and Minister for Economic Affairs and Digital Transformation Nadia Calviño, to discuss policy responses to the pandemic, OECD secretary-general Angel Gurría said: “Uncertainty is clearly extreme in the current context, but the implications of that for macroeconomic policies are not symmetric. Policy-makers were right not to be too slow to introduce emergency measures, and they should now guard against being too quick to withdraw them.”
“How governments act today will shape the post-COVID world for years to come,” he added. “This is true not only domestically, where the right policies can foster a resilient, inclusive and sustainable recovery, but also in terms of how countries co-operate to tackle global challenges together. International co-operation, a weak point so far in the policy response, can create confidence and have important positive spillover effects.”
Presenting the Outlook, OECD chief economist Laurence Boone said: “Extraordinary policies will be needed to walk the tightrope towards recovery. Restarting economic activity while avoiding a second outbreak requires flexible and agile policymaking.” She said the safety nets and support currently provided for badly hit sectors would need to be adapted to help businesses and workers move to new activities.
“Higher public debt cannot be avoided, but debt-financed spending should be well-targeted to support the most vulnerable and provide the investment needed for a transition to a more resilient and sustainable economy,” she said.
“Governments must seize this opportunity to build a fairer economy, making competition and regulation smarter, modernising taxes, government spending and social protection,” she added. “Prosperity comes from dialogue and co-operation. This holds true at the national and global level.”
The Outlook calls for stronger international co-operation to help end the pandemic more quickly, speed up the economic recovery, and avoid harming the catch-up process of emerging-market economies and developing countries. It also argues for encouraging more resilient supply chains, including larger holdings of stocks and more diversification of sources locally and internationally.