17 September 2020
The latest OECD Economic Outlook Interim Report, published on 16 September, moves up the partial recovery, reducing the forecasted negative impact of the COVID-19 recession in 2020 to -4.5% of GDP, from -7.6% as stated in the June edition of the Economic Outlook, while maintaining growth expectations for 2021 at 5% of GDP.
China, in particular, is the only country with positive growth in 2020, at 1.8% of GDP, while the United States and Europe show a milder than previously expected impact of the coronavirus recession, tampering the damage to the global economy. On the other hand, India, Mexico and South Africa will experience an even larger recession than anticipated three months ago.
The OECD is still very cautious about its forecast, claiming that uncertainty is dominant and that economic performance remains highly dependent on the behaviour of the COVID-19 pandemic – whether it will hit hard in the months to come, realising a double-hit scenario with renewed lockdowns to economic activity, or it will be contained and managed, the basic single-hit scenario on which the forecast has been updated.
The OECD rightly advocates for «sustained fiscal support […] well into 2021», avoiding any «premature budgetary tightening at a time when economies are still fragile». If compared to the early months of the COVID-19 crisis, however, when broad and un-targeted fiscal support was tolerated, the OECD is now calling for adjustments to emergency programmes, explicitly including job retention schemes and income support measures, «to limit long-lasting costs from the crisis and encourage the needed reallocation of resources towards expanding sectors». In particular, «governments need to re-assess and adapt the design and balance of support measures, ensuring that they are well targeted, closely monitored, and reduced gradually as the recovery progresses to facilitate the necessary reallocation of labour and capital towards sectors with better long-term prospects».
It is true, indeed, that the current recession is having a lasting impact on the world economy, putting under considerable strains specific sectors and accelerating historical processes that were under way before the COVID-19 pandemic hit. Work organisation is changing, with increasing reliance on new digital technologies, product de-materialisation and smart-working; corporate strategies are under question, since risks associated to excessive off-shoring and fragmented global value chains came to light; consumer preferences are shifting, while the role of the public sector in the economy is rapidly surging to renewed relevance.
However, the Interim Report does not give indications about how the selection between viable and un-viable sectors should be conducted at the present stage. For example, up to March 2020, the OECD was tagging tourism as «an important driver of economic growth» and a «key part of a growing service economy». However, in August 2020 global commercial flight numbers were still 40% lower than before COVID-19. In the absence of a vaccine, it is reasonable to expect that the recovery in the tourism sector will be much slower and more painful than in others. Should governments unplug support to tourism businesses and workers, in order to facilitate their re-allocation to other sectors?
Only six months into the COVID-19 recession, picking winners and losers in terms of economic activity would be like pulling wires in an electric switchboard, without knowing which one will cause the circuit to go dead. First, it was the timely and unprecedented public support to household income that dampened the blow of the recession. This support came in the form of short-term work schemes and strengthened unemployment benefits that underpinned a moderate consumption revival and economic activity in OECD countries. It is unclear, though, whether this support will persist long enough to bridge the time between now and when long-term structural recovery plans kick in, creating new job opportunities for redundant workers. According to the OECD Interim Report, persisting uncertainty will hold back investments for a prolonged period. According to the ILO Monitor, by the end of 2020 working hours lost due to COVID-19 will reach the equivalent of 400 million full-time jobs, making the idea of a smooth transition from unviable to viable jobs more of an intellectual exercise than a reasonable policy goal. Removing current support to most vulnerable workers would not be an effective incentive towards their reallocation; rather it would trigger a sharper fall in consumption that could unravel what was preserved in the previous months of the crisis.
In this sense, better than simply fading out support to private businesses and workers on the basis of pure market signalling, current support measures could be an adequate tool to influence company policies, not only in terms of employment levels but also investment in new and green technologies, supporting the structural transition that is required in order to build back better.
The latest OECD Interim Report advocates for a prolonged fiscal support and cautions against a premature consolidation that would unravel growth. It calls, on the other hand, for a progressive resource re-allocation and better targeting. In the absence of a concrete discussion about what makes winners and losers in the present context of systemic fragility and uncertainty, such call for re-targeting support could lead to prematurely pulling fiscal stimulus out of specific sectors in the economy. While putting the proverbial carrot in front of private companies can be a good idea in order to accelerate sustainable investment and achieve economic and social justice, suspending support to workers and companies at the present time would mean hitting them with a heavy sticky precisely when their heads are most exposed.