Pandemic stimulus debt will ‘come back to haunt us’, warns OECD

The extra debt being taken on by already heavily indebted governments and companies to tackle the coronavirus crisis will “come back to haunt us”, Angel Gurría, secretary-general of the OECD, has warned. 

Speaking in an interview during the FT’s Global Boardroom online conference on Wednesday, Mr Gurría said: “We are going to be heavy on the wing because we are trying to fly and we were already carrying a lot of debt and now we are adding more.”

Mr Gurría, who has run the Paris-based club of mostly rich nations for 14 years, said governments may have to “capitalise” some of this extra debt by bailing out companies or writing off some of the vast loan guarantees they have extended to keep banks lending.

He forecast that many countries’ economies would recover more slowly than initially expected from the record postwar recession that is expected in the first half of this year; it could take at least two years before many countries recover from the shock to their economies.

“I am not convinced that we are going to have a V-shaped recovery,” he said. “I think it will be more like a U. The key thing is to shorten the lower part of the U . . . When you are thinking about the recovery, we don’t know whether it is going to be 2021 or 2022.”

His comments echoed remarks IMF managing director Kristalina Georgieva delivered to the same event on Tuesday, when she warned the global economic outlook had darkened further in the weeks since the IMF forecast that the pandemic would cause the worst downturn since the 1930s.

In mid-April, the IMF forecast global output would contract 3 per cent this year and net public debt would rise from 69.4 per cent of national income last year to 85.3 per cent in 2020.

Mr Gurría said the OECD estimated that every month of “hard lockdown” in which social interactions were restricted to contain the spread of coronavirus would knock 2 percentage points off economic growth. 

After several European countries outlined plans to lift much of their lockdowns this month, he warned that the process of returning to some form of normality in daily life would be a slow one. 

“You have really got to throw everything you have got at beating the virus,” said Mr Gurría. “I see the reopening as touch and go — it is not a science — it is more of an art.”

The recovery could be disrupted by governments’ and companies’ attempts to simplify and shorten their supply chains to source more production locally and make them less exposed to the kind of disruption caused by the pandemic, he added.

“People say, ‘I would like to have my supply chain closer to me’ [but] that may not be the most cost-effective solution, it may not be the most efficient solution. It would be better to diversify the sources of supply,” he said.

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