OECD warns of risk to global financial health
The global economy faces its biggest threat since the global financial crisis, the OECD says, and governments cannot gamble on an automatic sharp bounceback once the threat of coronavirus passes.
In the Organisation for Economic Co-operation and Development’s latest economic outlook, Laurence Boone, its chief economist, said the virus could have a wide-ranging effect on the health of global finances.
She said there was already significant economic disruption because of quarantines, travel restrictions, factory closures and a sharp drop in service sector activities.
Coronavirus could be expected to have a bigger economic effect than Sars had because China was now more integrated in the global economy.
‘‘As China accounts for 17 per cent of global GDP, 11 per cent of world trade, 9 per cent of global tourism and over 40 per cent of global demand of some commodities, negative spillovers to the rest of the world are sizeable,’’ she said.
‘‘There is mounting evidence of sharp declines in tourism, supply chain disruptions, weak commodity demand and falling consumer confidence. High frequency indicators such as coal demand suggest the Chinese economy slowed sharply in the first quarter of 2020.’’
Boone said the drop in Chinese activity could reduce global GDP this year by 0.5 per cent, if the epidemic peaked in the first quarter and outbreaks in other countries were mild.
That would mean global growth of 2.4 per cent this year, compared to 2.9 per cent last year. That would be the lowest level since the global financial crisis.
A longer-lasting, more intense outbreak could mean global growth dropped to 1.5 per cent this year, she said.
‘‘Temporary supply disruptions can be met by using inventories, but inventory levels are lean due to just-in-time manufacturing processes and alternative suppliers cannot easily be obtained for specialised parts. A prolonged delay in restoring full production in affected regions would add to the weakness in manufacturing sectors in many countries, given the time it takes to ship supplies around the world.’’
The OECD report called for governments to act now, improving resources in the health sector, stepping up temporary cash transfers to vulnerable households, reducing or delaying tax payments for affected sectors, expanding availability of credit to businesses, reducing public sector arrears to businesses and ensuring monetary policy responded to market conditions.
‘‘The world economy is now too fragile for governments to gamble on an automatic sharp bounce-back,’’ Boone said.
Economist Shamubeel Eaqub said the coronavirus threat was ‘‘huge’’.
‘‘We have not experienced a supply shock like this in living memory.
‘‘The Reserve Bank should cut rates immediately, ideally alongside announcing funding lines for banks to roll over debt and push for banks to help businesses through a cash crunch due to the outbreak.’’