Slow international vaccine rollout dampens economic outlook

OECD chief economist Laurence Boone said current difficulties in the manufacturing and supply of the COVID-19 vaccines mean that this year the economic outlook is much closer to the downside scenario.

The licencing of the first vaccines to fight the COVID-19 pandemic prompted a stock market rally in late 2020 and a brighter economic outlook.

However, economists warned that any forecasts suffered from considerable uncertainty. So much so that the OECD published in December of last year, in addition to a baseline outlook, two alternative scenarios depending on the development of the pandemic and the speed at which vaccines can be deployed, lockdown measures loosened, and parts of the global economy are able to fully reopen.

Current difficulties in the manufacturing and supply of COVID-19 vaccines mean that this year the economic outlook is much closer to the negative scenario, according to OECD chief economist Laurence Boone.

In a presentation to the OECD Inclusive Framework on BEPS on 28 Jan., Boone said the forecast for much of 2021 is somewhere between the baseline outlook and the downside scenario, with a steeper acceleration possible thereafter.

The baseline forecast expects 4% global GDP growth in the next two years, which would only bring countries back to their 2019 level during the course of 2022.

It also entails that by the end of 2022, the global economy would have lost about $6 trillion as a result of the pandemic.

“That is a huge loss,” Boone said.

Although there is much hope that vaccines will allow a return to relatively normal life, vaccines are not a magic wand and manufacturing and deployment takes time, she added.

Within this projection, there is a diverse range of economic activity depending on the pandemic-related restrictions in each individual country.

China is the positive outlier with a predicted GDP growth of close to 10% between 2019 and 2021, whereas most other countries’ economies are expected to shrink during the two-year period.

Boone noted the weaker economy will create three main challenges concerning unemployment and underemployment, bankruptcies and public finances.

Employment

The OECD chief economist said current COVID-related unemployment and underemployment must be considered against the backdrop of the long-term trend of digitalisation and automation.

For the past three decades, there has been an increase in the number of jobs that are replaced as a result of automation, particularly those of low- and medium-skilled workers, and a decrease of jobs that benefit from automation.

In other words, the displacement from automation is much less likely to be offset by new technologies that increase human productivity and labour demand, Boone noted.

The current crisis is hitting labour-intensive sectors much harder, and typically these sectors have the highest concentration of low-skilled workers, young people and employees with precarious contracts.

This raises the question of whether COVID-induced automation can permanently reduce the demand for certain low-skilled workers, she said.

Bankruptcies

While recessions typically cause a rise in bankruptcies, last year saw the opposite.

Boone said the swift support from policymakers during the crisis, for example in the form of loan and liquidity guarantees, together with the suspension of bankruptcy procedures in some countries, had caused bankruptcy numbers to collapse.

Obviously, that doesn’t mean that we won’t see bankruptcies. It means that they will be postponed in time,” she said, adding that in most countries current corporate debt levels are higher than in 2009.

Moreover, Boone said, it is troubling that mostly small firms are impacted by the crisis because they are typically more dynamic, more innovative and they create more jobs.

“We are at great risk of seeing a massive wave of bankruptcies as policy support is being withdrawn, and that will happen when vaccines are being deployed and economic activity has started to rebound.”

Government finances

Some governments will have to pull back support quicker than others.

Globally, the government debt-to-GDP ratio could rise by 28 to 30 percentage points, the economist warned.

“That’s unheard of in peace time,” she said.

If the economy develops closer to the OECD’s upside scenario, the increase in the ratio of debt-to-GDP would be smaller but still a sizeable 15 percentage points.

The OECD advocates that this should not lead governments to withdraw fiscal support immediately, but measures will have to become more targeted as the crisis continues. Due to low interest rates, debt servicing costs are much lower now than they were in 2014.

“This is not solving the public finance issue, but it’s buying us a lot of time to actually review the structural challenges that we have ahead of us for people, jobs, and also to help firms cope with what’s happening at the moment,” Boone said.

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