Historic contraction in Rich Economies presages long Climb Back

OECD members suffer the worst drop in economic output in at least six decades, while continued coronavirus outbreaks cloud the recovery.

By guest author Paul Hannon from Wall Street Journal

The world’s rich economies experienced the deepest contraction in at least six decades in the spring, according to fresh data published Wednesday, while continuing outbreaks of the novel coronavirus mean their path back to pre-pandemic levels of output is likely be fraught.

The Organisation for Economic Cooperation and Development Wednesday said the combined economic output of its 37 members—most of which are rich—was 9.8 % lower in the second quarter than it was in the first, the largest decline since records began in 1960. The previous largest fall in output during a single quarter was the 2.3 % drop recorded in the first quarter of 2009, at the height of the global financial crisis.

Surveys and other data indicate that economic activity began to recover as early as May, when a number of countries lifted some of the restrictions designed to contain the virus.

Record ContractionThe combined economic output of the Organization for Economic Cooperation and Development’s 37members fell much more sharply in the three months through June than it did during the global financial crisis.

Economists expect to see a strong rebound in the quarter that runs through September, with the snap back in activity largest in those economies that saw the deepest declines in the second quarter, reasoning that the depth of those contractions reflected the severity and duration of lockdowns that have since been largely brought to an end.

But there are already signs that resurgent infection rates and the freshly imposed restrictions designed to contain them are weighing on growth, and will continue to do so until a vaccine becomes widely available.

“The global economy is turning around, and the worst is probably behind us,” said Jerome Jean Haegeli, chief economist at Swiss Re. “But the situation is serious. Lost output is lost.”

The U.K. saw the largest decline in gross domestic product during the period, a drop of 20.4% that was more than double the 9.5% decline recorded by the U.S. Finland saw the smallest drop, a 3.2% decline in output that was slightly smaller than South Korea’s 3.3 %. By contrast, China—which isn’t an OECD member—saw its economy expand by 11.5 %, reflecting the fact that it was the first country to suffer an outbreak of the virus, and the first to lock its economy down and then ease those restrictions.

In June, the OECD said it expected the global economy to contract by 6% this year, if a second wave of infections and containment measures can be avoided. But it warned that a resurgence in the pandemic would lead to a deeper contraction of 7.6% and damp the partial recovery that it expects to take place in 2021.

In addition to the toll taken by new restrictions as a number of countries see a fresh rise in infections, the speed of the recovery will depend on how many jobs are lost and how many businesses go bust as a consequence of weaker levels of activity.

Governments have provided huge amounts of support for both businesses and households over recent months, but one worry is that support may fade before the economy has had time to heal. In the U.S., lawmakers have been unable to agree on a new set of stimulus measures, and even if they ultimately do, the delay may slow growth.

“There’s a cost here even if we think that ultimately they’ll cave and reach a deal,” said Ethan Harris, head of economic research at Bank of America.

In Europe, governments in the economies hit hardest by the pandemic already face very high levels of debt, and while the European Union has agreed to provide some help, that will only come in 2021.

Central banks are in a position to provide further stimulus, with leading officials participating in the annual Jackson Hole gathering this week likely to set out the circumstances under which that help would be offered.

But there are those who worry that too much of the wrong kind of support will hamper growth over the medium term, partly by keeping afloat businesses that don’t have a future without that help.

“One of the key risks is that we don’t have an exit strategy,” said Swiss Re’s Mr. Haegeli. “We should keep dynamic capitalism alive.”