PARIS: The global economy will suffer the biggest peacetime downturn in a century before it emerges next year from a coronavirus-inflicted recession, the OECD said on Wednesday.
Updating its outlook, the Organisation for Economic Cooperation and Development (OECD) forecast the global economy would contract 6.0 per cent this year before bouncing back with 5.2 per cent growth in 2021 — providing the outbreak is kept under control.
However, the Paris-based policy forum said an equally possible scenario of a second wave of contagion this year could see the global economy contract 7.6 per cent before growing only 2.8 per cent next year.
“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,” OECD chief economist Laurence Boone wrote in an introduction to the refreshed outlook.
Policy response key to recovery
With crisis responses set to shape economic and social prospects for the coming decade, she urged governments not to shy away from debt-financed spending to support low-paid workers and investment.
“Ultra-accommodative monetary policies and higher public debt are necessary and will be accepted as long as economic activity and inflation are depressed, and unemployment is high,” Boone said.
As the threat of a second wave of contagion keeps uncertainty high, Boone said now was no time to fan the flames of trade tensions and governments should cooperate on a treatment and vaccine for the virus.
Global contraction
The U.S economy, the world’s biggest, is seen contracting 7.3 per cent this year before growing 4.1 per cent next year. In the event of a second outbreak, the US recession would reach 8.5 per cent this year and the economy would grow only 1.9 per cent in 2021, the OECD said.
Meanwhile, the euro area is heading for a downturn of 9.1 per cent this year followed by 6.5 per cent growth next year. But the recession could reach 11.5 per cent this year in the event of a second outbreak, followed by growth of 3.5 per cent in 2021.
Britain is expected to see the worst downturn among the countries covered by the OECD, with its economy forecast to contract 11.5 per cent this year before recovering 9.0 per cent next year. A second outbreak could trigger a slump of 14.0 per cent this year followed by a rebound of 5.0 per cent next year, the OECD said.
Stocks in Europe erased early gains along with US equity-index futures after the OECD report. The dollar held near a three-month low against a basket of peers.
The Stoxx Europe 600 index turned lower while S&P 500 futures reversed gains.
Earlier in Asia, benchmarks dipped in China and Japan. Hong Kong stocks fluctuated, while South Korea and Australia eked out modest gains. Treasury yields edged lower, and crude oil retreated.
There is more to the downtrun
The OECD’s assessment reminded investors that the economic hit from the pandemic is far from over, even after US employment numbers seemed to signal a recovery was under way in the world’s biggest economy. While the Fed is expected to keep its benchmark interest rate unchanged, investors will be looking for reassurance on the central bank’s willingness to keep providing extraordinary support for the economy. Policymakers may also comment on potentially targeting yields for some Treasury maturities.
“Markets have been cautious before the Fed meeting and technical indicators are stretched after the recent powerful rally,” strategists at Credit Agricole CIB led by Jean-Francois Paren said in a client note. “For now, it sounds like yield-curve control is the necessary condition for markets to further rally, but it may not be sufficient by itself as it also highlights the fragility of the system we are now living in.”
