OECD forecasts worst global peacetime recession in a century

The Paris-based policy forum predicts the global economy will contract 6 percent in the best-case scenario.

World GDP
A second wave of contagion this year could see the global economy contract 7.6 percent [File: Issei Kato/Reuters]

The global economy will suffer the biggest peacetime downturn in a century before it emerges next year from a coronavirus-inflicted recession, according to the Paris-based policy forum, OECD.

Updating its outlook on Wednesday, the Organisation for Economic Cooperation and Development (OECD) forecast the global economy would contract 6 percent this year before bouncing back with 5.2 percent growth in 2021 – providing the outbreak is kept under control.

However, the OECD said the equally possible scenario of a second wave of contagion this year could see the global economy contract 7.6 percent before growing only 2.8 percent 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 said in an introduction to the refreshed outlook.

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 governments should cooperate on a treatment and vaccine for the virus.

Expected recessions

The US economy, the world’s biggest, is seen contracting 7.3 percent this year before growing 4.1 percent next year.

In the event of a second outbreak, the US recession would reach 8.5 percent this year, and the economy would grow only 1.9 percent in 2021, the OECD said.

The United Kingdom is expected to see the worst downturn among the countries covered by the OECD, with its economy forecast to contract 11.5 percent this year before recovering 9.0 percent next year.

A second outbreak could trigger a slump of 14.0 percent this year followed by a rebound of 5.0 percent next year, the OECD said.

Meanwhile, the eurozone is heading for a downturn of 9.1 percent this year, followed by 6.5 percent growth next year.

But the recession could reach 11.5 percent this year in the event of a second outbreak, followed by growth of 3.5 percent in 2021.

Also on Wednesday, Isabell Koske, OECD’s senior economist, said Germany should make provisions to ensure banks have sufficient capital in case of a wave of bankruptcies in Europe’s largest economy.

“The German corporate sector is very heavily financed through bank loans,” she said. “Banks are therefore at greater risk of not seeing their loans again in the event of a wave of bankruptcies.”

Koske said German banks, in general, had relatively low returns and were weakly capitalised.

Source: News Agencies