‘Dire’ global economy could shrink 7.6% this year – the biggest peacetime crash since World War I, OECD warns

THE WORLD economy could shrink by a whopping 7.6% this year, the Organisation for Economic Co-operation and Development (OECD) has warned. 

According to the OECD, it will be the biggest peacetime crash since World War I. 

Calling the situation “dire”, the OECD said increases in government debt along with outstanding loans of private firms and banks would accompany the downturn. 

If there is no second wave of the virus, the OECD said that the UK economy will contract by 11.5% in 2020. 

This plunge is set to be worse than that experienced by France, Italy, Spain, Germany and the US. 

“As a service-based economy, the UK is heavily affected by the crisis,” the OECD said today in its latest economic projections. 

“Trade, tourism, real estate and hospitality are all hard hit by confinement restrictions.”

If there is a second wave of “rapid contagion” in the later months of 2020, the OECD predicts that the UK’s gross domestic product (GDP) will shrink by 14%. 

The US, Sweden and Brazil were on course for a decline of 7.4% or less in GDP while China was likely to drop by 2.6% and Russia by 8%. 

'UK WORST-AFFECTED'

While the UK is the worst-affected without a second wave, Spain and France will suffer a significantly larger decline in a “double hit” scenario. 

If a second outbreak occurs the UK’s employment rate is set to more than double to 10% and remain high for the entirety of 2021. 

The OECD also warned that the government’s furlough scheme is unlikely to be able to “fully offset” the long-term blow to employment. 

The UK economic response was commended, with the OECD saying that the UK government “swiftly” put in place a fiscal support package. 

Those measures, however, will see the UK’s fiscal deficit rise to at least 14% of GDP this year. 

The OECD’s chief economist, Laurence Boone, played down the significance of the UK's decline in the forecast saying it was difficult to be precise in the current situation.

The French economist said the exercise showed the UK would experience a similar contraction to Spain, France and Italy, which also imposed severe lockdowns.

She said: "These scenarios are by no means exhaustive, but they help frame the field of possibilities and sharpen policies to walk such uncharted grounds.

"Both scenarios are sobering, as economic activity does not and cannot return to normal under these circumstances.