The pandemic brings with it the third and greatest economic, financial and social shock of the 21st Century, after 9/11 and the Global Financial Crisis of 2008. This shock brings a double whammy: a halt in production in affected countries, hitting supply chains across the world, and a steep drop in consumption together with a collapse in confidence. Stringent measures being applied, albeit essential to contain the virus, are thrusting our economies into an unprecedented “deep freeze” state, from which emergence will not be straightforward or automatic.
The most urgent priority is to minimise the loss of life and health. But the pandemic has also set in motion a major economic crisis that will burden our societies for years to come. In many places ambitious initial responses are underway, and this is commendable. But only a combined, coordinated international effort will meet the challenge.
The sheer magnitude of the current shock introduces an unprecedented complexity to economic forecasting. The OECD Interim Economic Outlook, released on 2 March 2020, made a first attempt to take stock of the likely impact of COVID-19 on global growth, but it now looks like we have already moved well beyond even the more severe scenario envisaged then. The behaviour of financial markets reflects the extraordinary uncertainty of the situation. It is looking increasingly likely that we will see sequential declines in global GDP--or regional GDPs-- in the current and next quarters of 2020. And while it is too early to tell how far-reaching an impact COVID19 will have on many developing countries, particularly those in sub-Saharan Africa, it is clear that even if they are fortunate enough to escape the brunt of the health crisis, they will suffer economically, just as they did after the 2008 crisis. We are closely monitoring events and will be updating our analysis regularly.
Compounding a global health crisis with a major economic and financial crisis will put large strains on our societies. Even after the worst of the health crisis has passed, people will be confronted with the jobs crisis that will ensue. Well before the outbreak, the global economy already exhibited a number of underlying vulnerabilities, which now risk worsening the downturn that COVID-19 has delivered. These include the high level of corporate debt and trade tensions between major economies. Another important vulnerability are the gaps in income, wealth and job stability in many countries, which threaten a large part of our populations. More than one third of OECD households are financially insecure, meaning they would fall into poverty if they had to forgo three months of their income. As for the trade restrictions that have proliferated in the last few years, these may not only affect badly-needed medical supplies in some settings but also generate supply-chain disruptions in food or other essential goods and services. More broadly, they increase the risk of a more severe outbreak, as well as of a deeper and longer-lasting recession.
Now is the time for urgent and large-scale responses, to be taken at sub-national, national and international levels. They must be launched at once, taking into account different time horizons and imperatives: a) the immediate need to address the public health crisis ; b) the subsequent need to get the economy up and running again; and c) the longer-term need for new policy approaches to repair the damage and ensure that we are better prepared for future shocks. The OECD is leveraging its multi-disciplinary expertise to guide and support such actions.
The COVID-19 crisis has laid bare stark weaknesses in our health care systems, from the number of intensive-care beds to the size of the workforce, the inability to provide enough masks and to deploy testing in some countries, and deficiencies in the research for and supply of drugs and vaccines.
Beyond the immediate health policy response, the world needs decisive and ambitious actions to mitigate the economic downturn and protect the most vulnerable. This is all about people: older people and the young, women and men, those on low income or no income, those who were already facing a difficult situation and who will be hit hardest.
Only with immediate, large-scale and co-ordinated actions will the economy be ready for a quick and vigorous restart. It is encouraging that many major efforts and initiatives have already been announced, but greater international co-ordination is fundamental to ensuring these initiatives produce the best results, reassure markets and support the most vulnerable countries. Co-ordination among Central Banks is commendable, the recent statement by the G7 is powerful and gives some clear directions and the G20 will be holding an extraordinary virtual Leaders’ meeting next week, but much more coordination, across the whole breadth of policy areas, is urgently needed.
The OECD calls for a sizeable, credible, internationally co-ordinated four-pronged effort to provide the necessary resources to deal with the immediate public health emergency, to buffer the economic shock and develop a path towards recovery.
Today, as part of the OECD’s response to this crisis, we are launching a platform that will provide timely and comprehensive information on policy responses in countries around the world, together with OECD advice, in some cases. We will also be releasing a series of policy briefs on a range of subjects in the context of the COVID-19 crisis: on vaccines, taxes, education, SMEs, etc. Thus, we hope to help governments learn from each other in real time, facilitate co-ordination, and contribute to the necessary global action when confronting this enormous collective challenge.
In our global world, many issues cannot be dealt with anymore within domestic boundaries, be it a virus, trade, migration, environmental damages or terrorism. Multilateral action creates positive spillovers that will be more effective for each country than if they acted alone.
We need a level of ambition similar to that of the Marshall plan – which created the OECD – and a vision akin to that of the New Deal, but now at the global level.
Cool heads, individual and collective discipline, a heightened sense of solidarity and a shared sense of purpose will allow us to overcome these unexpected and challenging circumstances.
Efforts to contain virus and save lives should be intensified, and governments should plan stronger, more co-ordinated measures to absorb growing economic blow
Increasingly stringent containment measures, needed to slow the spread of the Coronavirus (Covid-19), will necessarily lead to significant short-term declines in GDP for many major economies, according to new OECD projections.
OECD Secretary General Angel Gurría, in preparation for the G20 Virtual Summit that took place yesterday, unveiled the latest OECD estimates showing that the lockdown will directly affect sectors amounting to up to one third of GDP in the major economies. For each month of containment, there will be a loss of 2 percentage points in annual GDP growth. The tourism sector alone faces an output decrease as high as 70%. Many economies will fall into recession. This is unavoidable, as we need to continue fighting the pandemic, while at the same time increasing efforts to be able to restore economic normality as fast as possible.
“The high costs that public health measures are imposing today are necessary to avoid much more tragic consequences and even worse impacts on our economies tomorrow,” Mr Gurría said, in his G20 Summit Statement. “Millions of deaths and collapsed health care systems will decimate us financially and as a society, so slowing this epidemic and saving human lives must be governments’ first priority.”
“Our analysis further underpins the need for sharper action to absorb the shock, and a more co-ordinated response by governments to maintain a lifeline to people, and a private sector that will emerge in a very fragile state when the health crisis is past.”
Mr. Gurría welcomed the outcome of the G20 Virtual Summit, hosted by the Saudi Presidency, and the resolve shown by the G20 members to use all ammunition to support people and SMEs. In his statement, Mr Gurría built on his recent call for a “global Marshall Plan” to counteract the pandemic’s effects. To “inoculate” economies to current and future shocks, he urged the G20 Leaders to act immediately, to:
- Recapitalise health and epidemiological systems;
- Mobilise all macro-economic levers: monetary, fiscal, and structural policies;
- Lift existing trade restrictions especially on much needed medical supplies;
- Provide support to vulnerable developing and low-income countries;
- Share and implement best practices to support workers and all individuals, employed and unemployed – particularly the most vulnerable;
- Keep businesses afloat, particularly small and medium-sized firms, with special support packages in hardest hit sectors such as tourism.
Mr Gurría stressed that the implications for annual GDP growth will ultimately depend on many factors, including the magnitude and duration of national shutdowns, the extent of reduced demand for goods and services in other parts of the economy, and the speed at which significant fiscal and monetary support takes effect.
In all economies, the majority of this impact comes from the hit to output in retail and wholesale trade, and in professional and real estate services. There are notable cross-country differences in some sectors, with closures of transport manufacturing relatively important in some countries, while the decline in tourist and leisure activities is relatively important in others.
The impact effect of business closures could result in reductions of 15% or more in the level of output throughout the advanced economies and major emerging-market economies. In the median economy, output would decline by 25%.
Variations in the impact effect across economies reflect differences in the composition of output. Many countries in which tourism is relatively important could potentially be affected more severely by shutdowns and limitations on travel. At the other extreme, countries with relatively sizeable agricultural and mining sectors, including oil production, may experience smaller initial effects from containment measures, although output will be subsequently hit by reduced global commodity demand.
There will also be some variation in the timing of the initial impact on output across economies, reflecting differences in the timing and degree of containment measures. In China, the peak adverse impact on output is already past, with some shutdown measures now being eased.
The OECD has committed its expertise to support governments in developing effective policies in any sector necessary to slow the pandemic’s spread and blunt its economic and societal effects – from health, taxes, labour and employment to SMEs, education, science and technology, trade and investment and more.