Global Economy Facing Deep Recession, Long Painful Recovery: OECD

The Organization for Economic Co-operation and Development, or OECD, issued grim warnings about prospects for the global economy amid the ongoing Covid-19 pandemic.

The crisis, OECD said in a report issued Wednesday, has “triggered the most severe recession in nearly a century and is causing enormous damage to people’s health, jobs and well-being.”

Even as businesses start to reopen and restrictions ease, the path to economic recovery “remains highly uncertain and vulnerable to a second wave of infections,” OECD warned.

If a second wave of coronavirus emerges later this year, the global economy could shrink by 7.6%, before gaining 2.8% 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,” the Paris-based group added.

In an alternate scenario – the absence of a second outbreak – OECD forecasts global gross domestic product falling 6% in 2020 and OECD unemployment climbing to 9.2% from 5.4% in 2019.

“The economic impact of strict and relatively lengthy lockdowns in Europe will be particularly harsh,” OECD noted.

Laurence Boone, chief economist for OECD, described the latest economic outlook as "very sobering” and "the most uncertain and dramatic outlook since the creation of the OECD.”

GDP in the euro area is expected to crater by 11.5% this year if a second wave of the virus breaks out -- and drop by more than 9% even if a second wave does not occur.

U.S. GDP is projected to drop 8.5% if a second wave hits, or by 7.3% if it does not.

“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%, 10%, and 8.2% respectively in case of a double hit scenario, and 7.4%, 8% and 7.5% in case of a single hit,” OECD indicated. “China’s and India’s GDPs will be relatively less affected, with a decrease of 3.7% and 7.3%, respectively, in case of a double hit and 2.6% and 3.7% in case of a single hit.”

In both scenarios – one with a second outbreak, one without -- Boone said, the “shock to the world economy and living standard is absolutely unprecedented and it will have long-lasting effects." She emphasized that "all OECD countries are in recession and a large number of them are in a double-digit recession.”

Moreover, recovery will be slow and painful whether or not a second outbreak strikes.

“Most people see a V-shaped recovery, but we think it’s going to stop half-way,” Boone said. “By the end of 2021, the loss of income exceeds that of any previous recession over the last 100 years outside wartime, with dire and long-lasting consequences for people, firms and governments.”

The crisis will leave long-lasting scars, featuring a decline in living standards, high unemployment and weak investment,” OECD added.

Job losses in the most affected sectors, such as tourism, hospitality and entertainment, will particularly hit low-skilled, young, and informal workers, the organization noted.

"I don't think we can let young people be scarred for life from this crisis," Boone commented.

“Uncertainty is clearly extreme in the current context, but the implications of that for macroeconomic policies are not symmetric,” said OECD Secretary-General Jose Angel Gurria. “Policymakers were right not to be too slow to introduce emergency measures, and they should now guard against being too quick to withdraw them.”

Gurria added: “How governments act today will shape the post-Covid world for years to come. 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 cooperate to tackle global challenges together. International cooperation, a weak point so far in the policy response, can create confidence and have important positive spillover effects.”

Boone proposed that “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. “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.”

Boone particularly praised the European Commission's proposed €750 billion ($853 billion) recovery fund.

"The advantage of this plan is that the grants do not add to the national debt," Boone said.