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Recovery After the Pandemic Shock: an Economic Assessment

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On September 8th, Ángel Gurría, Secretary-General of the OECD and Member of the Board of Re-Imagine Europa, presented an overview of the economic consequences of COVID19 to the Advisory Board of Re-Imagine Europa.

The dinner debate that followed with President Giscard d’Estaing, Mr Alain Lamassoure, Mr Carlos Moedas and Ms Erika Widegren tried to assess how this forecast will impact the work of the organisation and what needs to be done to adapt activities to this discussion.

No country in Europe can consider the pandemic to be part of the past, and its social and economic consequences will be substantial at least for the next two or three years. While the full extent of economic disruption is still not apparent, the latest OECD Interim Economic Assessment (“Coronavirus: Living with uncertainty”), published on September 16th, 2020, shares crucial insights on the current crisis and on what is to be expected in the near future.

 

OUTLOOK AND PROJECTIONS

The general economic outlook remains exceptionally uncertain. Global output in the second quarter of 2020 was over 10 per cent lower than at the end of 2019, an unprecedented sudden shock in modern times. International trade collapsed, declining by over 15 per cent in the first half of 2020, and labour markets were damaged by reductions in working hours, job losses and the enforced shutdown of businesses.

Recovery is now underway following the easing of strict confinement measures and the re-opening of businesses. Uncertainty remains high, and confidence is still fragile. Investment intentions have weakened, suggesting that elevated uncertainty is likely to keep business investment at low levels for some time.

Recovery projections depend on many factors, including the magnitude and duration of new virus outbreaks, the degree to which current containment measures are maintained or reinforced, the time until an effective treatment or vaccine is deployed, and the extent to which significant fiscal and monetary policy actions support demand. Global GDP could decline by 4.5 per cent this year, before picking up by 5 per cent in 2021. In most economies, the level of output at the end of 2021 will probably remain at or below that at the end of 2019 and considerably weaker than projected before the pandemic.

 

MITIGATION MEASURES AND GLOBAL CO-OPERATION

The extensive policy actions that governments across the world deployed as the pandemic expanded helped to prevent an even larger collapse and to buffer the incomes of households and companies through lockdowns and restrictions. Sporadic outbreaks of the virus are still occurring, and many sectors are struggling to adjust. Fiscal and monetary policy support should be maintained to preserve confidence and limit uncertainty.

Enhanced global co-operation and co-ordination is essential to mitigate the effects of the COVID-19 outbreak, speed up the economic recovery, and keep trade and investment flowing freely. No country can obtain the range of products necessary to combat the pandemic exclusively from domestic resources. Increased international co-ordination of border and supply chain management would also help to reduce uncertainty and limit the costs of border closures.

At the same time, governments will have to balance short-term and long-term measures, facilitating the immediate recovery by supporting viable jobs and companies while ensuring that policy allows sufficient flexibility for necessary reallocation across sectors to occur over time. Premature withdrawal of fiscal support in 2021 could restrain growth, as happened in the aftermath of the global financial crisis in many countries. Well-targeted and closely monitored short-term measures should fade gradually as the recovery progresses, to facilitate the necessary reallocation of labour and capital towards sectors with better long-term prospects.

Failure to do so could delay a recovery of aggregate productivity by trapping resources in non-productive “zombie” firms and jobs and reduce the prospects for job switching to more productive and higher-paid positions. It is easy to imagine that such negative consequences would affect young people in particular. Job retention schemes, such as short-time work programmes or wage subsidies, are useful in preserving existing jobs but may hinder desirable post-crisis adjustment across sectors, especially if the recovery is slower than expected.

 

AN OPPORTUNITY TO RESHAPE CURRENT MODELS

Government efforts to support the economic recovery also need to take advantage of the opportunity to incorporate the necessary actions required to limit the long-term threat from climate change. Sector-specific financial support measures should be conditional on environmental improvements where possible, such as more substantial environmental commitments and performance in pollution-intensive sectors that are significantly affected by the crisis.

The potential for an extended period of significantly lower fossil-fuel prices than previously expected raises the need to introduce effective incentives for firms to invest in energy-efficient technologies. Governments can also help directly by deploying well-designed investments in low-carbon infrastructure and taking advantage of opportunities to support behavioural changes that may help a low-carbon transition, such as facilitating teleworking and enhancing widespread availability of high-speed broadband in rural areas.

 

Read the full text of the report here

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