OECD Warns: Now Not the Time to Pull Back on Aid

Chris Gaetano
Published Date:
Jun 10, 2020
A report from the Organisation for Economic Cooperation and Development (OECD) said that policy makers were right to respond to the global pandemic's economic damage with swift action, but warned that while parts of the economy are reopening, they should not see this as a sign to cease their efforts. The OECD found that, regardless of whether there is a second wave of infections (to which it said the world remains "highly vulnerable"), the economic consequences of the pandemic will be "severe and long-lasting," as the path to recovery remains highly uncertain.

In the event there is no second wave, the OECD still predicts that global economic activity will fall by 6 percent in 2020 while global unemployment will increase to 9.2 percent, from 5.4 percent in 2019. Given a world population of 7.8 billion, this means 717,600,000 people out of work. While living standards will fall less sharply in this scenario, the OECD said that five years of income growth will still be lost across the global economy by 2021.

In the event there is a second wave of infections, the OECD's projections become remarkably worse. In this case, the return of widespread lockdowns will mean worldwide economic output plummeting by 7.6 percent instead, before recovering by 2.8 percent in 2021. Meanwhile, the projected world unemployment rate would be 10 percent, or about 780,000,000 of the world population.

For the United States in particular, GDP is estimated to decline by 7.3 percent, compared to the previous period, if there is no second wave. If there is, that decline is projected to be  8.5 percent. The report also said that unemployment will likely remain high for some time, given the sheer scale of job losses.

Massive monetary and fiscal responses, said the OECD, have definitely helped, but "more will be needed to reduce lingering effects, such as large numbers of bankruptcies and labor market exits." It said that supplements to unemployment payments should continue alongside additional tax relief for households directly affected by the mass lockdowns. It also noted that people will need additional assistance to return to work.

The report also said that as the immediate business support measures are withdrawn, some businesses will face liquidity concerns, which could easily transform into questions about solvency. It also warned that uncoordinated action by creditors could lead to fire sales of liquidated assets, provoking a further negative macroeconomic shock. This could be eased, however, if regulatory forbearance and liquidity support continues as the economy recovers. It also highlighted the current protests across the country as underscoring the importance of ensuring a broad-based recovery that does not leave behind disadvantaged groups who often only benefit when a recovery is well under way. In this context, federal, state and local governments should support job placement and retraining services.

The OECD report reaches a similar conclusion to that of a recent International Monetary Fund report on global financial stability. In its report, the IMF said that a further tightening of financial conditions risks exposing even more vulnerabilities in the global economy, which the report terms "pre-existing conditions." While banks likely have enough capital to weather the storm, the IMF said this means the biggest risks are actually to nonfinancial firms: Due to their high levels of debt, they could be condemned to years of negative growth and elevated funding costs. The report also pointed to asset managers, many of whom entered the crisis with higher leverage, maturity and liquidity mismatches. The risks facing both groups have the potential to create further ripple effect through the rest of the economy.

Both reports come at a time when, in the wake of better-than-expected job figures and the slow reopening of the economy, policy makers are considering pulling back or ending the massive aid programs enacted at the start of the crisis. This has led to a degree of anxiety among beneficiaries, many of whom are not experiencing any sort of economic recovery at all on a personal level.

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