A light shines in the darkness cast by Covid-19


Covid-19 has been a devastating global shock. But the vaccine news is really encouraging. The economic impact has also not been as severe as feared about six months ago. In addition, a sane and decent man will soon take over as President of the United States. Maybe the world will emerge from the nightmare sooner and in better shape than many feared.

The last Economic perspective OECD is less gloomy about the immediate economic impact of Covid-19 than it was in June. At that time, the Paris-based international organization was so uncertain that it provided not one forecast but two, neither of which was preferred. The most optimistic assumed a “single hit” from the coronavirus; the most pessimistic a double blow. In this case, large regions of the world, notably the United States and Western Europe, have suffered such a double blow. Yet this year’s economic performance is now expected to be better than feared in the event of a one-shot pandemic. (See graphics.)

This is not to minimize the severity of the impact. Global gross domestic product is expected to decline a further 4.2% this year, while the GDP of OECD members is expected to decline 5.5%. This recession will be the worst since the Depression. The OECD warns that “the mid-size economy of advanced and emerging markets could have lost the equivalent of four to five years of real income growth per capita by 2022”.

Still, the outcome could have been worse. Among the large economies, the ones that surprised the most this year were the United States – which is expected to decline 3.7% this year, compared to an expected 8.5% decline in June in the double-hit scenario – and the from China, which is expected, surprisingly, to rise 1.8 percent this year.

Inevitably, these aggregates hide great differences between people. The report shows how divergent the effects of the economic shock have been even in Australia, where the pandemic has been well contained. The crisis barely affected the number of hours worked by professionals and managers. The situation was much worse for salespeople, laborers, machine operators and those working in community services. The impact on the world’s poorest has been catastrophic: the World Bank predicts that 88 to 115 million people could be pushed into extreme poverty this year.

The graph shows the variation in the total number of hours worked by occupation in Australia (% change from one year to the next) indicating

What awaits us? In addition to its baseline forecast, the OECD is looking at a bullish scenario, in which the vaccine will soon be rolled out and confidence returns. Household savings rates have been extraordinarily high this year: the UK household savings rate, for example, is expected to drop from 6.5% of disposable income in 2019 to 19.4% this year. If this were to fall back quickly, demand would explode. In the downside scenario, confidence remains low and the long-term scars in the economy severe. The recovery is therefore delayed and weak. Even in the optimistic scenario, global production will not catch up to forecast levels from November 2019 until 2022 – the last horizon of forecasts. This is because losses may never be recovered.

The graph shows the household saving rate (net), as a% of disposable income, showing that household saving skyrocketed in the year of the pandemic

The proposition that the economic scars will be lasting is plausible. Not only investments have been affected in the short term, but also workers and businesses: jobs lost for the former, insolvency for many of them. The OECD paints a grim picture of the high proportion of viable businesses that will emerge with distressed debt and negative net worth. This is especially true in accommodation and food, arts and entertainment, and transportation.

The most important way to restore confidence is to deploy the vaccine as quickly as possible around the world. If necessary, people should be paid to take it. But good economic policy will also be crucial. In part, mistakes must be avoided, such as withdrawing support for monetary and fiscal policy prematurely or retreating to protectionism. But it will also be crucial to get it right: help people find new jobs and, most importantly, deal with debt overhang.

The graph shows the expected development of GDP, Q4 2021 vs Q4 2019 (G20 countries,% difference) showing that many countries are expected to suffer huge production losses

As the OECD points out, converting debt to equity will be an important part of this effort. A recent report from the Institute for Innovation and Public Purpose at University College London recommends public wealth funds as part of an attempt to replace debt with equity at a loss. The debt restructuring effort must also include emerging and developing countries. Much of this debt restructuring will fall on the balance sheets of the 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 uneven. East Asian countries have done much better than high income western countries in dealing with the pandemic. Governments that have the capacity to do so are generally successful in supporting their economies. But international cooperation has been much worse than after the financial crisis of 2008. The effort to create vaccines, however, has been a triumph.

The graph shows the percentage of otherwise struggling viable businesses *, by industry, showing that the success of previously viable businesses is expected to be dramatic

We must now use this success to put an end to this nightmare as quickly and comprehensively as possible. We must take the necessary steps to restore confidence and bring economies – altered, no doubt, in important ways – to life. We must not allow a slow recovery that leaves deep and lasting scars on the economic, social and political fabric. High income countries let this happen after the global financial crisis. They don’t have to start over, especially since a solid and healthy recovery is within their reach.

As Oscar Wilde could tell us, making a mess after a crisis can be considered a misfortune; to do it twice would sound like recklessness.

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