Thu | Jul 2, 2020

OECD predicts heavy damage to global economies due to pandemic

Published:Tuesday | June 16, 2020 | 12:12 AM

As Jamaica moves to reopen its borders, Minister of Health and Wellness Dr Christopher Tufton has urged the nation to brace for a major spike in the number of coronavirus cases. Meanwhile, the Organisation for Economic Co-operation and Development (OECD) predicts heavy damage to trade and global economies due to the COVID-19 pandemic.

The assessment from the Paris-based OECD predicts that outcomes will range from ‘bad’ to ‘worse’ as global infections are at or near all-time highs with damages to economies inescapable, according to American Shipper , an online maritime-focused publication.

“By the end of 2021, the loss of income will exceed that of any previous recession over the last 100 years outside of wartime, with dire and long-lasting consequences to people, firms and governments,” warned OECD chief economist Laurence Boone in a statement to American Shipper.

The OECD outlined two scenarios: ‘single hit’, in which the virus continues to recede and remains under control, and ‘double hit’, in which a second wave of infections erupts by year end.

“Both forecasts are ugly. In single hit, global GDP falls six per cent this year and US GDP drops 7.3 per cent. In double hit, 2020 global GDP plunges 7.6 per cent and US GDP 8.5 per cent, while 2021 recoveries are much slower.

“World trade is now contracting sharply,” said the OECD, which estimated a decline of 3.75 per cent in the first quarter and said that “an even larger global output decline [is expected] in the second quarter.”

The full-year hit to global real trade growth is expected to be significantly more severe than the hit to GDP: -9.5 per cent under single hit; -11.4 per cent under double hit. The double hit scenario posits a dramatically slower trade recovery in 2021, with growth of 2.5 per cent compared to six per cent under single hit.

The more systemic threat to trade – particularly for container shipping – is that the pandemic could convince companies to bring sourcing back home. “The crisis has demonstrated the vulnerability of domestic production to sourcing inputs from distant locations through complex global value chains (GVCs),” said the OECD.

The risk is that GVCs will “be shortened to reduce input sourcing risk and enhance resilience,” said the OECD, which noted that this threat “comes on top of other threats to international trade” from rising tariffs.

The US-China trade dispute could be worsened by COVID-19. “The fulfilment of the US-China Phase One trade deal may be undermined by weaker demand due to the pandemic,” said the OECD.

As Boone summed up the trade threat: “Economies are diverging. The pandemic has accelerated the shift from ‘great integration to ‘great fragmentation’.”