Second Pandemic Wave Would Inflict Big Economic Cost, Says OECD

Date: Thursday, June 11, 2020
Source: The Wall Street Journal

A resurgence of the pandemic later this year would damp the partial recovery that is expected to take place in 2021

A second wave of lockdowns to counter a resurgent novel coronavirus would deal a terrible blow to a global economy already facing a severe contraction, the Organization for Economic Cooperation and Development said Wednesday.

In its latest report on the global outlook, the Paris-based research body released one of the gloomiest forecasts for growth yet published by an international financial institution. The OECD said it expected the global economy to contract by 6% this year if a second wave of infections and containment measures can be avoided. A contraction on that scale would be twice as large as the decline in activity forecast by the International Monetary Fund in April.

In response to the spread of the virus, governments around the world closed large parts of their economies from mid-March and began to lift those restrictions in May. Thus far, the easing of restrictions hasn’t led to a surge in new infections, but that remains a threat.

However, the OECD took the unprecedented step of offering two separate series of growth forecasts, reflecting the high level of uncertainty around the pandemic’s course. In a second-wave scenario, the global economy would shrink by 7.6% this year.

A resurgence of the pandemic later this year would damp the partial recovery that is expected to take place in 2021. Without a second wave this year, the OECD expects to see growth of 5.2% next year. With it, the rebound would be a more muted 2.8%.

In an interview with The Wall Street Journal, OECD Chief Economist Laurence Boone said the scale of the forecast contractions reflects the fact that until a vaccine becomes widely available, workers and businesses will have to “live with” the virus. That means that some borders will remain closed, and a range of services involving close personal contact will be limited, while new approaches to social distancing at work will mean higher costs. Nor are the adjustments likely to prove costless in the longer term.

“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,” Ms. Boone said.

The uncertainty of the economic outlook reflects the unanswered questions about the conditions that are favorable to the spread of the virus, and the degree of immunity acquired by those who have already been infected.

“We don’t know if it’s seasonal, we don’t know if you’re protected if you get it,” Ms. Boone said. “We only know that massive testing, tracing and isolation will be needed to keep it at bay.”

In the U.S., the OECD expects the economy to shrink by 7.3% this year, rebounding by 4.1% next year if a second wave is avoided. If it is not, this year’s contraction is expected to be 8.5%, and next year’s rebound 1.9%.

The Congressional Budget Office, a nonpartisan legislative agency, last week forecast the economy would contract by 5.6% this year.

The research body sees larger declines in output in some European economies. For the eurozone, it forecasts a drop in gross domestic product of 9.1% this year, to be followed by a rebound of 6.1% in 2021 if there is no second wave. Should there be a resurgence in the pandemic, it projects a contraction of 11.5% followed by a rebound of 3.5%.

The OECD is also downbeat about China’s prospects. While many other economists expect the world’s second-largest economy to grow modestly this year, the OECD’s forecasters expect to see a contraction of 2.6%, to be followed by an expansion of 6.8% in 2021. If the country were to suffer a second wave, the contraction would deepen to 3.7%, and the rebound amount to 4.5%.

The OECD, which offers policy advice to its 37 members, said governments had acted promptly to support businesses and households through the lockdowns. But it said they should soon turn their attention to help them shift away from activities that are likely to be less viable in the future, and toward those that are likely to grow, such as electronic commerce.

“You can’t shelter an economy for 12 months,” said Ms. Boone. “The support has to evolve.”


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