Understanding Structural Effects of COVID on Global Economy

Report – Christine Arriola, Przemyslaw Kowalski, Frank van Tongeren, OECD, 6 May 2022

Understanding structural effects of COVID-19 on the global economy: first steps

The COVID-19 pandemic and associated policy responses are likely to alter the global economy in a way that affects its ability to adjust to future shocks and changes.

This paper develops a point of reference for thinking about developments which could be deemed long-term and which could in turn be incorporated into what we call a ‘post-COVID-19 baseline.’ Using the OECD’s CGE model METRO, the paper finds that output declines observed in 2020 were driven primarily by reductions in labour productivity, due to varying abilities to telework across countries.

Negative economic impacts were largely mitigated by government support to firms and households. Border measures to control the spread of the virus also had less of an impact on total output, reflecting important government efforts to facilitate cross border flows of goods and services whilst managing cross border movements of people. Demand shifts had the smallest impact on global GDP, but had significant and heterogeneous impacts on consumption, output and trade changes across countries and sectors. This in turn contributed to pressures on some global supply chains.

Executive Summary

In a period of frequent and significant changes, it becomes increasingly difficult to make predictions on what the future brings. Yet, calls for policy initiatives targeting efficiency and security of supply, including those which are relevant for specific supply chains which can be deemed ‘essential’ or ‘strategic’ in the current context, such as pharmaceuticals and manufactured electronic products, call for medium to long-term assessments. This is also the case for policy considerations to ease restrictions on cross-border movement of people, which can facilitate post-pandemic structural adjustments. In order to conduct such assessments, it is necessary to adjust the modelling base line of standard quantitative frameworks like the OECD METRO Model.

This paper proposes to work towards a new baseline by using the outcome of an impact analysis of the COVID-19 pandemic and the associated policy responses on the global economy and international trade using the OECD METRO Model. For this purpose, the main COVID-19-related effects observed in 2020 in the following areas are assessed: (1) the impacts of containment measures on: (i) labour market changes; and (ii) consumer demand shifts; and (2) the impact of government policies affecting: (iii) trade costs for goods and services trade; and (iv) fiscal policy measures directed at supporting firms and households. The effects observed in 2020 and analysis of the broader policy context provide a point of reference for thinking about developments which could be deemed long-term and which would in turn be incorporated into what can be called a post-COVID-19 modelling baseline.

The baseline and the METRO model can also be used to build on work in Arriola et al. (2020[1]) and analyse further how different shocks can on the one hand reinforce and on the other abate each other in globally interlinked economic systems, and thus contribute to the identification of stress points in supply chains.

Read the full report here: https://www.oecd-ilibrary.org/docserver/f6a9ef88-en.pdf?expires=1652834779&id=id&accname=guest&checksum=2402F0B8CBC1C171F2E445F9408A3744.