Covid-19 has been a devastating global shock. But the news on vaccines is really encouraging. The economic impact has also not been quite as bad as feared about half a year ago. Moreover, a sane and decent man is soon going to take over as president of the US. Just maybe, the world will emerge from the nightmare sooner and in better shape than many feared.
The latest from the OECD is less gloomy about the immediate economic impact of Covid-19 than it was in June. At that time, the Paris-based international organisation was so uncertain that it provided not one forecast but two, neither of which was preferred. The more optimistic one assumed a "single hit" from coronavirus; the more pessimistic one a double hit. In the event, large parts of the world, notably the US and western Europe, experienced such a double hit. Yet the economic outcomes this year are now expected to be better than had been feared in the case of a single-hit pandemic. (See charts.)
This is not to downplay the severity of the impact. Global gross domestic product is still forecast to shrink by 4.2 per cent this year, while the GDP of OECD members is forecast to shrink by 5.5 per cent. This recession will be the worst since the Depression. The OECD warns that "the median advanced and emerging-market economy could have lost the equivalent of four to five years of per capita real income growth by 2022".
Yet the outcome might have been worse. Among the big economies, the ones that have surprised most this year have been the US — forecast to shrink by 3.7 per cent this year, against June's forecast decline of 8.5 per cent in the double-hit scenario — and China's, which is forecast, amazingly, to expand by 1.8 per cent this year.
Inevitably, these aggregates conceal vast differences among people. The report shows how divergent the effects of the economic shock have been even in Australia, where the pandemic was well contained. The crisis barely affected the number of hours worked by professionals and managers. The situation was vastly worse for people in sales, labourers, machinery operators and those working in community services. The impact on the world's poorest has been catastrophic: the World Bank forecasts that 88m to 115m people may be pushed into extreme poverty this year.
What lies ahead? In addition to its baseline forecast, the OECD looks at an upside scenario, in which the vaccine is rolled out soon and confidence returns. Household savings ratios have been extraordinarily elevated this year: the UK's household savings ratio is, for example, forecast to jump from 6.5 per cent of disposable incomes in 2019 to 19.4 per cent this year. If this fell back quickly, demand would explode. In the downside scenario, confidence remains weak and long-term scarring of the economy severe. The recovery is correspondingly postponed and weak. Even under the optimistic scenario, global output will not catch up with levels forecast back in November 2019 until 2022 — the latest forecast's horizon. Indeed, the losses may never be recouped.
The proposition that economic scarring will be lasting is plausible. Not only has investment taken a short-term hit, so too have workers and businesses: lost jobs for the former, insolvency for many of the latter. The OECD paints a sobering picture of the high proportion of viable businesses that will emerge with distressed debts and negative net worth. This is especially so in accommodation and food, arts and entertainment, and transportation.
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The most important path to restoring confidence is to roll out the vaccine as quickly as possible across the world. If necessary, people should be paid to take it. But good economic policy will also be crucial. Part of what is needed is to avoid mistakes, such as withdrawing monetary and fiscal policy support prematurely or retreating further into protectionism. But it will also be crucial to do things: support people into new jobs and, not least, deal with debt overhangs.
As the OECD stresses, converting debt into equity will be an important part of this effort. A recent report from the Institute for Innovation and Public Purpose of University College London recommends public wealth funds as part of an attempt to replace debt with loss-bearing equity. The effort to restructure debt must also include emerging and developing countries. A great deal of this debt restructuring will fall on the balance sheets of governments of high-income countries. No alternative exists.
So far, the global effort to manage the impact of this pandemic can only be described as spotty. East Asian countries did far better than western high income countries in managing the pandemic. Governments with the capacity to do so were generally successful in supporting their economies. But international co-operation was far worse than after the 2008 financial crisis. The effort to create vaccines, however, has been a triumph.
Now we must use that success to bring this nightmare to a close as quickly and as globally as possible. We must take the measures needed to restore confidence and bring economies — changed, no doubt, in important ways — back to life. We must not permit a slow recovery that leaves deep and lasting scars on the economic, social and political fabric. High-income countries let that happen to themselves after the global financial crisis. They must not do so again, especially as a strong and healthy recovery is within their reach.
As Oscar Wilde might tell us, to make a mess of the aftermath of one crisis may be regarded as a misfortune; to do so twice would look like carelessness.
Written by: Martin Wolf
© Financial Times