Economy

OECD warns coronavirus could halve global growth

Organisation calls on world governments to take action as virus hits economies and businesses

The OECD called on governments to act “swiftly and forcefully” to combat the health and economic effects of Covid-19, calling for supportive monetary and fiscal policies to restore confidence

Mon Mar 2 2020 - 18:00

The OECD sounded the alarm about coronavirus on Monday, warning that it could halve global economic growth this year from its previous forecast.

The Paris-based group lowered its central growth forecast from 2.9 per cent to 2.4 per cent, but said a “longer lasting and more intensive coronavirus outbreak” could slash growth to 1.5 per cent in 2020.

It defined a more intensive outbreak as one that spread “widely” throughout the Asia-Pacific region, Europe and North America, and issued its warning as new cases were reported around the world and the death toll continued to climb.

The OECD, a group of mostly rich countries, said the effect of widespread factory and business closures in China alone would cut 0.5 percentage points from global growth, as it reduced its main forecast to 2.4 per cent.

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Its warning came as heavy hints of central bank support for the global economy jolted stock markets higher on Monday, following a dire week in which global equities lost one-tenth of their value.

The Bank of Japan said it would “provide ample liquidity and ensure stability in financial markets”, while the Bank of England said it was working with international partners “to ensure all necessary steps are taken to protect financial and monetary stability”.

Two of Europe’s most senior central bankers have said they were closely monitoring the economic impact of the coronavirus and stood ready to act if needed.

Luis de Guindos, vice-chairman of the European Central Bank, said the ECB remained “vigilant and will closely monitor all incoming data” while underlining its standard guidance that it “stands ready to adjust all its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner”.

François Villeroy de Galhau, governor of the Banque de France, said in a radio interview on Monday: “We are vigilant, we are mobilised, but we will remain calm and proportionate in the responses that must be provided.”

Interest rates

The US Federal Reserve said on Friday that it would “act as appropriate” to support growth, using a phrase it has previously deployed to signal a willingness to consider cutting interest rates.

The OECD called on governments to act “swiftly and forcefully” to combat the health and economic effects of the virus, calling for supportive monetary and fiscal policies to restore confidence.

It said governments should ensure first that there was “additional fiscal support for health services” but also that governments should help cushion households and companies from sudden drops in income, by for example allowing companies to delay tax payments.

“More broadly, lower policy interest rates and stronger government spending can help boost confidence and assist with the recovery of demand once the outbreak eases and travel restrictions are removed,” the OECD said.

But it also recognised that economic policies could not offset the immediate effects of shutdowns in business activity designed to slow the spread of the virus.

New data on Monday showed that Italy endured its 17th consecutive monthly decline in manufacturing activity in February. On Sunday, the Italian government announced plans to inject €3.6 billion into the economy.

In Brussels, Paolo Gentiloni, the EU’s economics commissioner, said there would need to be a timely co-ordinated fiscal response to the coronavirus outbreak, warning that previous hopes for a “V-shaped” rebound could prove optimistic.

Ideas

Euro zone finance ministers will this week discuss ideas for a fiscal reaction to the crisis in a conference call. “It needs to be very timely. You can’t take it too early, you can’t take it too late,” said Mr Gentiloni, adding that a “fiscal response cannot be an exhaustive answer” but could still prove very useful.

“It is time to declare that the EU is ready to use all the available policy options as and when needed to safeguard our growth against these downside risks,” he said. “This is time for solidarity, it is time to build confidence, it is time to act.”

Mr Gentiloni also said the EU would consider an expected request from Italy for greater budgetary flexibility in a spirit of “solidarity and understanding”.

– Copyright The Financial Times Limited 2020

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