Sobering predictions: GDP estimates in different Covid-19 scenarios

In its June 2020 Economic Outlook, the OECD describes the near future as highly uncertain. Its analysis focuses on “two equally probable scenarios” regarding the Covid-19 crisis – one in which another major outbreak is avoided in 2020 and one where the world is hit by a second wave of new infections and consequently new lockdowns.

World GDP is expected to decline with 6% and 7,6% in a single and double hit scenario respectively. While OECD expects world economic output to climb back 2,8% in 2021 in a second wave scenario, widened inequality, disrupted education and undermined confidence in the future will have a severe impact. Even if the world is not hit by a second wave, five years of income growth will have been lost across the economy by 2021.

In OECD’s calculations, Europe will be hit harder than other continents in terms of its economic output. Estimates suggest a 9,1% and 11,5% decrease in Europe under both scenarios compared to 7,3% and 8,5% in the United States and 2,6% and 3,7% in China. Emerging economies are said to face the challenge of strained health systems, a collapse in commodity prices, large capital outflows and plummeting remittances.

“With or without a second outbreak”, the OECD notes, “the consequences will be severe and long-lasting”. Both scenarios are thus sobering, with economic activity not returning to normal under either scenario and the loss of income exceeding that of any previous recession over the last 100 years outside wartime.

With unemployment soaring, OECD notes in particular that “capital and workers from impaired sectors and businesses will have to move towards expanding ones”, as governments cannot uphold private sector activity and wages for a prolonged period. History has shown that transitions in the labour market are difficult and rarely happen fast enough to prevent a sustained period of unemployment. The OECD therefore again makes a plea for a rise in public investment in digital and green technologies to promote long-term sustainable growth.

Much has happened since the previous OECD economic outlook was published in March. We will know in the next quarter which of the two scenarios is the most realistic.

Edited by: Dr. Olivier Vonk