People who lost their jobs wait in line to file for unemployment benefits in Fort Smith, Arkansas, US.
People who lost their jobs wait in line to file for unemployment benefits in Fort Smith, Arkansas, US. © REUTERS

Rich countries face a disappointing economic recovery from the historic downturn caused by the pandemic, which will leave deeper scars than any peacetime recession in the past 100 years, the OECD has warned.

In a downbeat set of forecasts, the international organisation said on Wednesday that although developed economies were likely to experience a rapid initial bounceback from the recession, it would probably fall far short of bringing living standards back to their pre-pandemic level in early 2020.

The forecasts paint a far gloomier picture of the next few years than global equity markets, which have recovered sharply from their March lows as investors take a much more upbeat view about global prospects.

Laurence Boone, chief economist of the OECD, said the economic impact of coronavirus on unemployment, corporate bankruptcy and adjustments to normal life forced by social distancing would be large and would prevent a normal economic recovery from recession.

“Most people see a V-shaped recovery, but we think it’s going to stop half way,” she 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.”

If the world avoids a second wave of Covid-19, the global economy is likely to contract by 12 per cent in the first half of 2020 and by the end of 2021 it will still be below the level it reached at the start of 2020, the OECD said. The cumulative economic hit by the end of next year would be more than 6 per cent compared with the OECD’s forecast last November.

“When you reopen the sectors that can function nearly normally, then you obviously get a surge in activity, but because the virus is prevalent elsewhere or is not eradicated in our countries, then some borders remain closed, some mobility will be hampered and some sectors cannot function like entertainment or mass gatherings,” Ms Boone said.

Line chart of Global real GDP index, Q4 2019 = 100 showing OECD expects a slow recovery with large economic scars

In a more pessimistic scenario, the OECD warned that a second wave of the virus this winter would knock 10 per cent off output by the end of next year, compared with its previous forecasts.

The OECD predicts a 6 per cent contraction in 2020 for the global economy, followed by a 5.2 per cent rise in 2021 — a much worse global crisis than the forecasts published by the IMF in April. It predicted the global economy would contract by 3 per cent this year followed by a 5.8 per cent bounce in 2021 which would recover most of the lost ground.

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While all advanced economies have been hit by the pandemic, there are likely to be substantial differences in performance depending on how well nations perform in dealing with the virus, according to the OECD.

South Korea, which has implemented effective testing, tracking and isolating of coronavirus cases, is expected to contract by only 1.2 per cent in 2020, followed by growth of 3.1 per cent next year.

By contrast the UK will suffer the largest contraction this year, with economic output falling 11.5 per cent followed by a 9 per cent rise in 2021, the OECD said.

The US is likely to contract less than the eurozone, with output in the two most powerful advanced economies dropping 7.3 per cent and 9.1 per cent this year respectively. This is likely to be followed by growth of 4.1 per cent in the US in 2021 and 6.5 per cent in the eurozone next year.

Bar chart of GDP in 2021 compared with 2019 (%) showing Fortunes likely to vary by 2021

Ms Boone praised countries for the “blanket” support provided by fiscal and monetary policy as the pandemic struck but said it was now time to think about a more “targeted” and “flexible” approach that encouraged people to move into new sectors to find jobs to replace the ones that would disappear.

“We shouldn’t repeat the mistake of the financial crisis and withdraw fiscal policy support too quickly,” she said. But once the economic outlook was clearer in a few years, she added, “then we will have to look at the [accumulated government] debt and more than anything the progressivity of the tax and benefit system because this crisis is widening the differences between people”.

The OECD lamented the rupturing of trade links in the crisis and urged countries not to turn their backs on globalisation if they wanted to enhance the prosperity of their populations.

“Global co-operation to tackle the virus with a treatment and vaccine and a broader resumption of multilateral dialogue will be key for reducing doubt and unlock[ING] economic momentum,” Ms Boone said.

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