Governments are being asked to consider extreme measures to keep the economy pumping during the coronavirus outbreak – including extra pay and tax relief for health workers, temporary VAT cuts to keep people spending and reduced employers’ taxes to prevent layoffs.
The Organisation for Economic Cooperation and Development (OECD) warned on Monday that outbreak has plunged the world economy into its worst downturn since the global financial crisis.
Growth in the world economy will be half what had been expected, at just 2.4pc the OECD said. That will be the worst growth since 2009. If the outbreak worsens in Asia, Europe and North America global growth could drop as low as 1.5pc this year, the OECD warned.
The OECD, which advises rich countries on policy, says governments and central banks should stimulate demand to avoid an even steeper slump – something that did not happen in Europe during the financial crisis because policy makers bet on austerity instead.
“The main message from this downside scenario is that it would put many countries into a recession, which is why we are urging measures to be taken in the affected areas as quickly as possible,” OECD chief economist Laurence Boone told Reuters.
She said the governments needed to support health systems with extra pay or tax relief for workers doing overtime and short-time working schemes for companies struggling with a slump in demand.
Governments could give companies further financial relief by cutting social charges, suspending value-added taxes and providing emergency loans for sectors particularly hard, such as travel, Ms Boone said.
Meanwhile, central banks could provide comforting signals to stressed financial markets that they stand ready to further ease monetary policy and provide liquidity to banks if needed.
“We don’t want to add a financial crisis to the health crisis,” Ms Boone said.
Officials with the US Federal Reserve, European Central Bank and Bank of Japan have signalled in recent days that they stand ready to do more if needed.
If the situation deteriorates, a coordinated response of central bank easing and fiscal stimulus amounting to 0.5pc of economic output in G20 countries could lead to 1.2pc higher growth within two years, the OECD calculated.