(Bloomberg) --
The coronavirus pandemic is splintering the world economy, and its impact on businesses and the most vulnerable will require extraordinary government action, the OECD warned.
It made the grim assessment in its quarterly outlook, where it forecast a global slump of 6% this year, more than the World Bank earlier this week. That’s based on a scenario of the virus continuing to recede. A second wave, which the OECD said is an equally likely scenario, could mean a 7.6% contraction.
Given the already clear impact of virus-related restrictions and lockdowns, the outlook is unsurprising. But the OECD also highlighted deepening fault lines created by the virus, including wide economic divergences across countries based on the severity of the outbreak, health systems, and the fiscal capacity of governments to respond. More trade restrictions are springing up, and lockdowns have heightened inequalities between workers, with the youngest and least qualified on the front line.
With some sectors facing long-term damage -- airlines have already announced thousands of job cuts -- the OECD also warned that an increase in bankruptcies and sustained period of unemployment is likely. Governments must adapt support to help that transition and provide protection.
“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,” OECD chief economist Laurence Boone said. “The pandemic has accelerated the shift from ‘great integration’ to ‘great fragmentation.’”
Policy Tightrope
In the outlook, the organization sees the U.S. shrinking more than 7% in 2020 in the “single-hit scenario” while the euro area suffers a 9% hit. Italy, France and the U.K. will all shrink more than 11%.
It’s an unprecedented challenge for governments, who’ve already spent billions to keep businesses afloat and workers in jobs until their economies reopen. The OECD said policy makers will have to walk a “tightrope” between continuing to provide exceptional -- and costly -- safety nets and not being trapped into upholding activity for a long period.
“We’ve never seen such uncertainty,” Boone said. “That’s the most difficult thing in this crisis -- things have to evolve week by week because the situation may change so dramatically.”
Governments must pay particularly attention to the most vulnerable, according to the report. The young and low-paid are make up a larger share of the workforce in the sectors most exposed to job losses and health risks, while highly qualified workers have more often been able to work at home.
“Everywhere, the lockdown has also exacerbated inequality across workers,” Boone said.
Policymakers should be careful not to withdraw support too fast, even with exceptionally high levels of public debt and an already dramatic increase in central bank balance sheets, the OECD said. In the bleaker double-dip scenario, it would fall to fiscal authorities to provide more stimulus with limited scope for monetary policy.
“It’s really important we don’t repeat the mistake of the financial crisis and that we do support this transition until growth and employment growth regains momentum,” Boone said.
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