OECD urges fiscal action to battle coronavirus fallout

Australia has room to implement fiscal stimulus measures to combat the coronavirus fallout, according to the OECD.

Australia has room to implement fiscal stimulus measures to combat the fallout from the COVID-19 coronavirus without endangering economic stability, according to the OECD.

The Paris-based research body, in its interim economic outlook, also said the outbreak could halve global growth this year as it singled Australia out as likely to be one of the hardest hit economically from the rapidly spreading virus.

In its worst-case scenario, global growth could be halved to 1.5 per cent worldwide if the outbreak spreads widely throughout the Asia-Pacific, as well as Europe and North America. The OECD also slashed 0.5 per cent from Australia’s forecast compared to projections released in November. It was now tipping Australia’s growth to be 1.8 per cent this year.

“A longer lasting and more intensive coronavirus outbreak, spreading widely throughout the Asia-Pacific region, Europe and North America, would weaken prospects considerably,” the OECD said as it called for stronger global policy co-operation. “The increasing constraints on monetary policy suggest that a swift and sizeable discretionary fiscal response would be needed in event of a scenario of this type occurring.

“When significant downside risks materialise, with global growth set to be significantly weaker than projected, co-ordinated policy action within and across all the major economies is necessary for effective and timely economic stabilisation.”

Record low interest rates provided an opportunity for fiscal policy to be used more actively to strengthen near-term demand and to cushion the impact of the coronavirus outbreak, the OECD said.

While some discretionary fiscal easing, announced before the virus outbreak, was being undertaken in a number of advanced economies, additional stimulus measures “could be implemented without endangering debt sustainability in a number of economies, including Australia and Germany,” the OECD said.

It also warned that central banks including the RBA may need to take unconventional policy measures to protect against an economic shock as a result of the virus.

“Faced with a large negative shock of the magnitude considered, and an extended period of high uncertainty, there would be a rising chance that several central banks could become constrained by the zero lower bound on policy interest rates, including those in Australia, Korea and the United Kingdom,” it said. “Unconventional policy measures would then be needed to make policy more ­accommodative.”

In its best-case scenario, in which the epidemic peaks in China in the first quarter of the year and outbreaks in other countries are mild contained, the think tank ­estimates global growth of about 2.4 per cent this year. Global growth last year was 2.9 per cent.

The adverse impact on confidence, financial markets, the travel sector and disruption to supply chains would contribute to the downward revisions in all G20 economies in 2020, the think tank warned, “particularly ones ­strongly interconnected to China, such as Japan, Korea and Australia,” it said as it urged governments to act swiftly and forcefully to cushion the economic impact of the virus.

The coronavirus outbreak has rocked financial markets, sending them reeling last week amid fears of a pandemic as infections in Italy, Iran and South Korea rose sharply. After posting savage declines, US markets staged a turnaround on Monday, jumping 4-5 per cent.

The Australian market, meanwhile, ended Tuesday’s session up 0.7 per cent despite the RBA cutting the official cash rate to a record-low 0.5 per cent.