A new report from the Organisation for Economic Cooperation and Development (OECD) has warned that the potential impact of a second wave of COVID-19 could erode four years of economic growth in Australia.
In its report, the OECD said Australia was one of the world’s best responders to the coronavirus, and said the government’s JobKeeper and changes to the JobSeeker payment system, as well as low-interest rates would buoy the economy.
This could, however, be undermined by the potential economic damage of a second wave of the coronavirus, with the OECD saying the Australian economy could contract by 6.3%, taking it back to 2016-levels where it would grow by just 1% in 2021.
Unemployment figures would hit 7.6% by the end of 2020, and rise to 8.8% in 2021, with a $25 billion hit to the Australian economy.
This is in contrast to predictions of the economy without a second wave, which the OECD anticipates would result in a 5% drop in 2020.
Secretary General of the OECD, Angel Gurria said “now we’re in the midst of perhaps the most global health, economic and social crisis and it’s simply the most severe any of us have ever witnessed.”
The OECD report says that as a result of Australian’s high levels of debt, a second virus wave would create “debt servicing problems” that could potentially result in falling house prices and set the economy back in terms of a potential recovery.
Under the second-spike scenario, the OECD predicts the budget deficit would blow out to more than $210 billion, with a $100 billion shortfall in 2021-22.
In terms of a single-wave global scenario, the OECD predicts the world economy will shrink by 6% with a 5.2% recovery in 2021, but in the event of a second-wave, this would blow out to a 7.6% contraction and 2.8% recovery in 2021.
This would still mark the single largest contraction since the Great Depression. In spite of this, the OECD says Australia has displayed significant resilience compared to other developed economies.
Private spending is predicted to drop by 7.6%, unemployment is expected to rise to 7.4% and the federal deficit is anticipated to reach $170 billion, or 9% of Australia’s GDP for 2020-21. The OECD predicts that there will be an economic rebound in 2021 by 4.1%, and expects private spending and exports to increase 5.7% and 4.5% respectively.
Unemployment is expected to remain high, however, at around 7.6%.
“There is ample fiscal space to support the economic recovery as needed,” authors of the report said. “The authorities should be considering further stimulus that may be needed once existing measures expire at the end of the third quarter 2020.”
“Such support should focus on improving resilience and social and physical infrastructure, including strengthening the social safety net and investing in energy efficiency and social housing.”
Of all the developed economies in the world, just India, South Korea, Indonesia and China are expected to outpace Australia’s economic recovery. On the other side of the equation, the US faces a 7.3% contraction, France, an 11.4% decline and Britain, an 11.5% drop in a single-wave scenario.
Laurence Boone, the OECD’s chief economist has said that governments face considerable uncertainty in the absence of a vaccine or coronavirus treatment.
“Today’s recovery policies will shape the economic and social prospects in the coming decade,” Boone said, adding that “the recovery will not gain steam without more confidence, which will not fully recover without global cooperation. Confidence needs to be boosted both at the national and international levels,” he said.
“Even if growth does surge in some sectors, overall activity will remain muted for a while. Governments can provide the safety nets that allow people and firms to adjust, but cannot uphold private sector activity, employment and wages for a prolonged period,” he concluded.
Federal Treasurer, Josh Frydenberg has said that “there is still a long way to go in recovering from this once-in-a-hundred-year global pandemic but we are heading in the right direction and we will continue to do all that is necessary to ensure Australia bounces back stronger on the other side of this crisis.”