The American Rescue Plan is set to boost global growth

The American Rescue Plan is
set to boost global growth
by Nigel Pain and Patrice Ollivaud, OECD Economics Department

Global economic prospects have improved markedly in recent
months, helped by the gradual deployment of effective vaccines
against Covid-19, announcements of additional policy support
in several countries, and signs that economies are coping
better with measures to supress the virus. This is reflected
in the stronger recovery shown in the new OECD Interim
Economic Outlook, with global GDP growth now projected to be
5½ per cent in 2021 and 4% in 2022.

Strong and timely fiscal support since the onset of the
pandemic has played a vital role in supporting incomes and
preserving jobs and businesses. This should be maintained
whilst economies are still fragile and growth remains hampered
by containment measures and incomplete vaccination deployment.
As economies reopen, new discretionary fiscal measures can
also be an effective means of helping to close the large
shortfalls of output and jobs from their normal, pre-pandemic
levels.

The substantial fiscal support being provided in the United

States this year is an important factor behind the improved
global outlook. Already, the package of measures enacted in
December 2020, worth USD 900 billion (4% of GDP), has boosted
household incomes and, to a smaller extent, consumer spending
at the start of 2021. The new American Rescue Plan of USD 1.9
trillion (8½ per cent of baseline GDP) provides a considerably
larger additional stimulus that should raise aggregate demand
substantially in the United States, with welcome spillovers
for activity around the world. There is likely to be a clear
immediate boost from stimulus payments to households, which
represent around one-fifth of the overall package of measures.
Other measures in the Plan are only partly pandemic-related
and will take effect over the next year or so. Futher details
on the content of the American Rescue Plan will be provided in
a future blogpost.

Illustrative simulations on the NiGEM global macroeconomic
model suggest that the measures in the American Rescue Plan
could raise US output by around 3-4 per cent on average in the
first full year of the package (from 2021Q2 to 2022Q1). This
is broadly equivalent to the spare capacity estimated to exist
in the US economy in the December 2020 OECD Economic Outlook.

The US upturn also helps to stimulate demand in all other
economies. Output is raised by between ½‑1 percentage point in
Canada and Mexico, both close trading partners of the United
States, and between ¼‑½ percentage point in the euro area,
Japan and China (see Figure). Overall, global GDP is boosted
by around 1% during this period.

In these simulations, stronger US domestic demand improves
near-term job prospects, with US employment rising by between
2¼‑3 million by the end of 2021 and the unemployment rate
declining by between 1¼-2 percentage points. The demand upturn
also boosts import growth and widens the US current account
deficit by around ¾ per cent of GDP on average in the first
four quarters of the shock, despite higher US exports due to
stronger foreign demand. US price inflation picks up
temporarily, by around ¾ percentage point per annum on average
in the first two years of the shock, but not to a rate that
would necessarily require any immediate policy tightening by
the Federal Reserve given the new US monetary policy
framework. The overall budgetary cost in the near term is
lower than the size of the stimulus, with higher nominal
activity offsetting around one-quarter of the cost of the
discretionary stimulus measures. Even so, the US general
government debt-to-GDP ratio is raised by 6 percentage points
by 2023.

These simulations show the impact of an illustrative mix of
higher transfers to households, stronger final government
consumption and tax reductions introduced over 2021Q2-2022Q2.
The near-term impact of the US fiscal package will be
relatively large if consumers are “backward-looking” and more
sensitive to current income developments and the impact of

higher government transfer payments. In contrast, “forward-
looking” consumers, more focused on the lifetime income path
of incomes and the potential budgetary offset from higher tax
payments in the future, may spend less of the stimulus,
resulting in smaller spillovers to other countries.

In either case, there are substantial near-term gains to
output and the risks of lasting damage from a slow recovery
have been reduced considerably. Further ahead, the direct
impact of the Plan on output and inflation may be modest,
reflecting the temporary nature of the fiscal stimulus,
although there could be a lasting boost to the size of the
labour force from attracting back previously discouraged
workers. Growth prospects would also be improved if innovation
and investment were raised permanently (relative to baseline).
A faster recovery from the pandemic and additional policy
measures to help foster investment would raise the chances of
such an outcome.

See also The need for speed: Putting the World Economy on the
Fast Track out of the COVID-19 crisis

Reference:

OECD (2021), OECD Economic Outlook, Interim Report March 2021,
OECD Publishing, Paris, https://doi.org/10.1787/34bfd999-en.

The need for speed: Putting
the World Economy on the Fast

Track out                of      the       COVID-19
crisis
by Laurence Boone, OECD Chief Economist

This is no ordinary economic crisis. When you walk down the
street of a big city like Paris, its hard not to miss the
usually lively restaurants, bars and museums. Travel and
activity restrictions – completely unfamiliar to most of us
just one year ago, have now become a part of our daily lives.
In early March 2020, the OECD warned that COVID-19 could have
devasting effects on the world economy. One year later, amid
high uncertainty, a global recovery is in sight.

We have upgraded our growth projections

The good news is that the world economy is doing better than
what we expected only three months ago. Countries are learning
to better address the health situation, some are rolling out
vaccines and are gradually lifting restrictions to mobility.
People and firms have also adapted: producing, trading and
consuming differently in this new world of restrictions.

Undeniably, policy support helps. The exceptional fiscal and
monetary support that countries have deployed to protect firms

and people is working – supporting jobs, incomes and firms. In
addition, the massive foreseen US stimulus (USD 1.9 trillion
in addition to USD 900 billion in December 2020) will boost
the US economy in 2021 and add a full percent to world output
in our projection as discussed in our recent post on the
American rescue plan.

As a result, we project global growth of 5.6% in 2021 (Table
1), up from 4.2% in our December projections. Most countries
are bouncing back, but activity levels remain far behind where
we expected them to be in our November 2019 projections before
the pandemic. Moreover, divergence in economic performance
across and within countries is set to increase.

The best economic policy to exit this global pandemic is rapid
vaccination, worldwide

Differences in health management and vaccine rollout, and
consequently restrictions, as well as sectoral specialisation
in hard-hit sectors such as tourism and policy support are
driving the increase in divergence. Several emerging market
economies, as well as European ones, are lagging behind in the
recovery (Figure 1).

To speed up the rollout of vaccines, policymakers need to get
on a wartime footing with vaccine production and distribution.
Production is currently being scaled up thanks to voluntary
licensing, but more can be done. Governments should encourage
the maximum use of existing manufacturing vaccine facilities
and distribution networks, while fast-tracking consents for
new facilities where necessary. This means using government
purchasing leverage to foster private sector licensing,
transfer of technology deals and a cooperative effort across
firms that would normally be competitors. Regarding the
distribution of vaccines, this means governments requiring and
funding vaccination centres to operate seven days per week and
long hours.

To be effective, vaccine rollout needs to be not only fast,
but also global. This is the only way to win the race against
virus mutations and to fully reopen sectors such as travel and
tourism, which accounts for over 20% of GDP in some countries.
As long as the virus is raging somewhere, the risk of new
virus variants is high, which will mean that we will need to
keep some borders shut, restraining activity. A coordinated
and   multilateral   approach   to   licensing   and   technology

transfers, as well as purchasing, notably through increasing
funding to COVAX, is the most efficient way of scaling up
production and distribution worldwide, and especially in
emerging markets.

Fiscal support has been key in preserving the economic and
social fabric

Widespread vaccination will also make fiscal and monetary
support more effective. The countries that are able to combine
fast vaccination with supportive macroeconomic policies are
the ones expected to benefit from faster recoveries (Figure
2). As our economies re-open, many entertainment hotel and
restaurant workers can hope to get back to work. But,
prospects are not the same for everyone. Following the Global
Financial Crisis, young people struggled to find employment
and policy was too slow to react – it took a decade for the
employment prospects of graduates to “normalise” (Figure 3).
To avoid such a negative outcome and the scarring effects of
unemployment this time around, fiscal policy needs to be
better targeted at supporting young people, for example by
introducing wage subsidies to help firms expand apprenticeship
and in-firm training programmes. It also needs to make use of
the opportuntity to pave the way forward for a better future –
fixing the massive digital divide exposed by the pandemic and
directing investment to support environmental sustainability.

With the arrival of vaccines, the world economy will
eventually fully re-open for business. But how the recovery is
going to shape up is in the hands of policymakers: swift

vaccination, targeted fiscal support and ramping up investment
in new and green technologies can make a difference. Many
challenges lie ahead but this crisis has taught us the
importance of resilience: our ability to both avoid and
respond to shocks. And, without multilateral co-operation the
global recovery in growth and the jobs that go with it are at
risk. There is no time to waste!

Reference:

OECD (2021), OECD Economic Outlook, Interim Report March 2021,
OECD Publishing, Paris, https://doi.org/10.1787/34bfd999-en.

President   Biden’s  policy
priorities and their impact
on the economic outlook
By Miguel R. Gorman, OECD Washington Center, Patrick Lenain,
OECD Economics Department, Carl Romer, Brookings Institution,
and Ben Westmore, OECD Economics Department

The inauguration of President Biden on January 20 in
Washington, D.C, marked the launch of an ambitious policy
agenda for the four-year mandate. As he made clear during his
inaugural address, President Biden has broad policy priorities
in terms of health, jobs, income, climate and equity. If
approved by Congress and fully implemented by his
administration, these policies will boost the economic
recovery in the short term and, in the medium term, will
improve the wellbeing of Americans.

US economic situation in early 2021
The US economy has rebounded quickly since the second quarter
of 2020, when workers in many states were ordered to stay at
home and many businesses were ordered to shut their doors. GDP
is now expected by the consensus of economists to have
contracted by only 2.5% in 2020 (Q4 over Q4), a much less
severe fall than feared initially. After jumping to 13% in
May, the unemployment rate quickly dropped below 7% by the end
of the year. Boosted by the large fiscal stimulus and monetary
support, consumer demand has revived, putting the economy on a
pathway toward recovery.

However, these average numbers do not tell the whole story:
the pandemic has not impacted all Americans equally. While
high-wage workers experienced the recession during only a few
weeks and are now in near-normal employment conditions, others
have been hit by job losses and are facing weak demand for
their labour (Figure 1). Low-wage workers are still unemployed
in sectors operating well below capacity such as hospitality,
travel, tourism and entertainment. For them, unemployment
benefits are essential to make ends meet.

Source: Chetty et al (2020), Opportunity Insights. Change in
employment rates (not seasonally adjusted), indexed to January

4-31, 2020. This series is based on payroll data from Paychex
and Intuit, worker-level data on employment and earnings from
Earnin, and timesheet data from Kronos. The dotted line in the
low-wage series is a prediction of employment rates based on
Kronos data.

Combatting COVID-19
The COVID-19 pandemic has further increased the existing gaps
in income and wealth separating those living in poverty from
the well-offs. Job losses have also been disproportionately
concentrated in Black and Latino communities, with women
particularly hard hit. The pandemic has also highlighted the
inadequacies of the health system, where many remain uninsured
and even more are under-insured and unable to obtain adequate
healthcare when needed.

With COVID-19 contagions and deaths still at record levels
(Figure 2), a key priority of the Biden-Harris Administration
will be to reduce the spread of the virus and high death
tolls. Investment in contact tracing capacity will likely be
increased via the US Public Health Jobs Corps, which will hire
and deploy 100,000 public health workers. The new
administration has also vowed to take a more active role in
vaccine distribution, given much of the responsibility to date
has been shouldered by state governments, without clear
coordination. In the meantime, President Biden has halted the
US withdrawal from the World Health Organisation.

Source: Refinitiv.

Fiscal stimulus
The new administration is also prioritising additional fiscal
measures to support the economic recovery. The fiscal package
of US$900 billion agreed at the end of 2020 is helpful, but
insufficient, providing only modest support to the economy
beyond Q1 2021. A new package worth US$1.9 trillion (9% of
GDP) has been outlined, with spending largely distributed this
year. The proposed fiscal package would include another direct
cash payment to all Americans (US$1,400 per person), in
addition to the previous two payments; it would expand
emergency paid leave and unemployment programs, while
increasing the minimum wage to US$15; it would extend a 15%
increase of benefits under the Supplemental Nutrition
Assistance Program; it would expand tax credits for children
and child care and reducing health insurance premiums; it
would offer grants and investment capital to small businesses;
finally, as in some other OECD countries, it would provide
funding to help victims of domestic violence. Some of these
new initiatives, as well as those designed to contain the
pandemic, would entail additional federal funding to state and
local governments.

Making growth more inclusive and less
carbon-intensive
President Biden has said that longer-term reforms will make
growth more inclusive and less carbon intensive (Figure 3).
This may include automatic unemployment insurance stabilizers
and tax increases for high-income earners and corporations. In
addition, significant increase in infrastructure spending
could be legislated as well as investment to decarbonise the
economy and mitigate climate change. Such pledges accord with
the recommendations outlined in the 2020 OECD Economic Survey
of the United States. President Biden re-joined the Paris
Climate Agreement on the first day of his presidency and
intends to introduce more stringent fuel efficiency standards
and bolster the climate policies of federal agencies.

Source: OECD.

Working with international partners
President Biden has signalled he would approach international
cooperation in a different way, with the objective to “repair
alliances and engage with the world once again”. A renewed US
commitment to work with international partners to address
shared challenges will likely lead to a more ambitious agenda

notably on COVID-19, global recovery, climate change, swelling
debts in developing countries, trade imbalances, and
international corporate taxation.

A bipartisan           approach        to    the    reform
agenda?
Although President Biden enters office with a united
government, his slim majority in both chambers of Congress may
make it difficult to enact some aspects of his policy agenda.
A simple majority is needed for legislation attached to the
budget process (i.e. budget reconciliation legislation) and
nominations to executive branch positions and judicial
vacancies also only require a simple majority. However,
changes not related to the budget, such as related to climate,
immigration, minimum wages and labour regulations could be
difficult to legislate if the filibuster remains in place (as
it means legislation will need 60 votes to pass the Senate
compared with the 51   effective votes Democrats currently
hold). Similarly, the introduction of a public health
insurance option may face resistance. A bi-partisan approach
would be essential for all these policies.

The President has already started to act through Executive
Orders. He has announced that he will reinstate environmental
regulations. Furthermore, new measures including new appliance
and building efficiency standards and changes to make federal
government procurement more climate-friendly may be introduced
via this pathway. Even so, it is possible that Executive
Orders will face challenges in the courts.

What does this mean for the economy?
Overall, the stated policies of the incoming administration
would – if implemented — likely boost economic growth in the
short-term and make growth more inclusive and less carbon
intensive in the medium-term. A well-timed fiscal stimulus

would help avoid the recovery losing momentum in early 2021;
instead of expanding by about 3½ percent (y-o-y) next year, as
projected by the OECD, GDP growth could be notably stronger if
much of the proposed stimulus is approved. The immigration and
health care policies of the new administration are likely to
increase potential labour resources, supporting growth and
public finances. While stricter environmental standards may
inhibit firm growth, this is typically not the case for more
productive firms. Furthermore, such standards have the
capacity to drive innovation in environmentally friendly
technologies.

Further Reading
OECD information on the United States

OECD Economic Survey of the United States

OECD Economic Outlook, Country Note USA, December 2020

OECD Washington Center

President Biden’s Inaugural Address

President Biden’s American Rescue Plan

Will new monetary policy
frameworks     succeed     in
achieving inflation targets?
By Damien Puy, Łukasz Rawdanowicz and Kimiaki Shinozaki, OECD
Economics Department

Monetary policy has been successful in influencing financial
markets, the first stage of monetary policy pass‑through to
demand and inflation. But over the past two decades, core
inflation in advanced economies has rarely risen above
targets. Recently discussed and implemented changes to
monetary policy frameworks, which all depend crucially on the
inflation expectations channel, could help improve the
effectiveness of monetary policy and achieve stable and higher
inflation. However, challenges with controlling inflation
expectations, the uncertainty surrounding their effect on
demand, along with continued structural changes holding down
inflation all point to caution (OECD, 2020).

Monetary policy reviews
A combination of deep structural changes and unexpected shocks
has challenged the way monetary policy is conducted in many
advanced countries. The secular decline in productivity growth
and inflation, along with the reduction in the so-called
neutral interest rates, which balance aggregate demand and
supply, have significantly increased the risk that policy
rates hit the zero lower bound. The global financial crisis
and the COVID-19 pandemic, both of which prompted very
accommodative policy and an enlargement of monetary policy
tools, including purchases of public and private assets,
forward guidance and negative policy interest rates, further
highlighted the limits of conventional monetary policy
measures.

In this context, radical and comprehensive alternatives to
current frameworks have been discussed in both academic and
policy circles and several central banks in advanced economies
have embarked on formal monetary policy reviews. The
alternatives include raising the inflation target and one of
the so-called make-up strategies, like targeting an explicit
price (or nominal GDP) level, where past misses of the target
should be compensated in the future. Their efficacy crucially

hinges on the population’s understanding of, and reaction to,
monetary policy commitments and strong effects of demand-
supply imbalances on inflation – i.e. a steep Phillips curve.
The Bank of Japan’s “inflation‑overshooting commitment”
announced in September 2016 can be regarded as a form of a
make-up strategy. Similarly, the switch to a flexible form of
average inflation targeting (FAIT) will take the US Federal
Reserve closer to a price-level targeting, since the FOMC will
de facto aim to make up for past inflation misses. The ECB is
in the process of reviewing its framework.

Inflation expectations
When interest rates are low and close to the ZLB, the scope to
stimulate demand through yield curve changes, and in turn
inflation, is limited. In this case, inflation expectations
become the main available channel to boost inflation, as
assumed by many make-up strategies. However, three challenges
may reduce the effectiveness of inflation expectations as a
practical policy channel.

     Although firms set prices of most goods and services,
     little is known about their inflation expectations.
     Surveys of firms’ aggregate inflation expectations are
     rare and of limited quality, in contrast to surveys of
     households’ expectations (Coibion et al., 2020a).
     Both households and businesses are generally poorly
     informed about realised and expected inflation, or
     inflation targets, and their expectations have been
     persistently above targets (figure below). Households
     have a limited understanding of monetary policy
     announcements and expectations of neither households nor
     firms seem to respond much to such communications
     (Coibion et al., 2020a; Coibion et al., 2020b).

Evidence is mixed about the impact of inflation
expectations on households’ consumption. Under some
circumstances, households’ expectations about future
price changes can have a powerful impact on their
consumption decisions (like for VAT rate increases).
However, a durable boost to household consumption due to
monetary policy forward‑guidance, even when well
understood by consumers, may be less certain. Higher
expected inflation may not stimulate aggregate
consumption durably if real income is expected to
decline or stagnate. With constant nominal income,
higher inflation could just shift demand from non-
essential goods and services to necessities. Higher
inflation may also increase perceived uncertainty and
result in higher household saving. Moreover, the effects
of monetary policy are uncertain and refer to a distant
future, which may be discounted by households and
businesses in their consumption and investment
decisions.

Structural shifts in supply and demand
Over the past three decades, a combination of structural
changes in advanced economies, which are largely beyond
monetary policy decisions and communications, have aggravated
the challenge for central banks in attaining their inflation
targets.

     Globalisation, technological progress and market
     concentration:      The   integration     of  low-wage
     emerging‑market economies, in particular China, into
     global value chains (GVCs) combined with trade
     liberalisation over the past three decades has led to a
     substantial decline in production costs, expanded supply
     massively and increased import competition, putting a
     downward pressure on domestic producer goods prices.
     Globalisation has also coincided with a rapid
     technological progress in the production of many goods
     or their components, including electronics, adding to
     downward price pressures. The ensuing stronger import
     competition and rising market concentration can reduce
     the pass-through from wages to prices in goods-producing
     sectors.
     Retail sector and network industries: In the United
     States, over the past three decades, the retail sector
     has changed from one with many small firms to one
     dominated by large firms, with large retailers
     increasingly sourcing from China (Smith, 2019). The rise
     of general merchandisers selling goods from different
     industries could have led to reduced margins on some
     goods to attract clients as profits are maximised at the
     chain level and not for individual goods. The past
     decades have also witnessed a global rise of e‑commerce,
     which could have damped prices by increasing price
     transparency and eroding profit margins, notably in some
     traditionally face-to-face businesses. A growing
     importance of network industries in services (like

communication, TV and music streaming services, air
     transport) has also likely contributed to muted
     inflation developments. Maximisation of their profits
     depends on market share gains, limiting possibilities to
     increase prices persistently.
     Weakening demand and large supply: Limited price
     pressures resulting from globalisation and technological
     progress may have been weakened further by the relative
     saturation of demand for many durable goods compared
     with ample production capacities. When a new product is
     developed, demand for it grows very fast and income
     elasticity of demand is high, stimulating production
     capacity and technological progress and leading over
     time to lower prices. When the desired level of
     possession of the product has been attained, “new
     demand” for buying the good for the first time vanishes
     and demand is driven by replacement or renewal motives
     only. As this phenomenon may affect many durable
     household products in advanced economies (cars, home
     appliances, etc.), the scope to increase prices for such
     goods, that still account for a considerable part of the
     consumption basket, may be limited by the fear of a fall
     in demand.

If the above structural trends persist in advanced economies,
central banks may continue to struggle to achieve persistently
higher inflation in the future. There is, however, large
uncertainty about future structural developments, partly
related to uncertain long-term impacts of the COVID-19 crisis.

Bibliography

Coibion, O., Y. Gorodnichenko, E. S. Knotek II and R. Schoenle
(2020a), “Average Inflation Targeting and Household
Expectations”, Federal Reserve Bank of Cleveland Working
Paper, 20-26.

Coibion, O., Y. Gorodnichenko, S. Kumar and M. Pedemonte

(2020b), “Inflation Expectations as a Policy Tool?”, Journal
of International Economics, 124.

OECD (2020), “Issue Note 3. Post-financial- crisis changes to
monetary policy frameworks: Driving factors and remaining
challenges”, in Chapter 2 of OECD Economic Outlook, Volume
2020, Issue 2, OECD Publishing, Paris.

Smith, D. (2019), “Concentration and Foreign Sourcing in the
U.S. Retail Sector”, 2019 Meeting Papers, 1258, Society for
Economic Dynamics.

Explaining    cross-country
differences     in   growth
performance in the second
quarter of 2020
By Nigel Pain    and   Łukasz   Rawdanowicz,   OECD   Economics
Department

In the second quarter of 2020, as the pandemic spread and many
countries implemented strict containment measures, output and
consumer spending declined sharply in most economies. However,
the extent of the contraction differed significantly across
countries, with GDP and private consumption falling by over
15% in some countries, and by 5% or less in others. This blog,
based on the latest OECD Economic Outlook, highlights the
strong cross-country association between activity, the
strictness of containment measures and changes in mobility,
complementing the detailed analysis of the relationship
between mobility and containment policy measures in OECD

(2020).

Containment measures are captured using the aggregate
stringency index produced by the Oxford Blavatnik School of
Government (Hale et al., 2020), and mobility by the Google
location-based indicator of retail and recreational mobility,
a measure of visits to places such as shopping centres,
restaurants, theme parks, museums and cinemas. Changes in
containment measures are associated with changes in mobility,
but mobility measures may also pick up other factors, such as
voluntary physical distancing, or a reluctance to leave the
home when concerns about the pandemic are high. Both mobility
and the stringency of containment measures are strongly
correlated across countries with GDP growth and private
consumption growth in the second quarter of 2020 (see figure).

Note: The panels show OECD countries and selected non-OECD
advanced and emerging-market economies from Asia, Latin
America and Africa for which data are available (China is
excluded, as mobility data are not available). The country
coverage differs between the two panels. The vertical axes
show changes in the quarterly averages of the Oxford
stringency index and the Google mobility index for the retail
and recreation sector.
Source: OECD Economic Outlook 108 database; Google LLC, Google

COVID-19         Community         Mobility         Reports,
https://www.google.com/covid19/mobility; Oxford Coronavirus
government response tracker; and OECD calculations.

Empirical investigation

The relative importance of mobility and the stringency of
containment measures can also be assessed by estimating
cross‑country equations for quarterly changes in real GDP and
private consumption in the second quarter of 2020. Two
separate equations are estimated, one for GDP growth and the
other for private consumption growth, to assess whether there
are differences in the extent to which mobility and stringency
affect different activity indicators. For instance, cross-
country variation in GDP growth stems in part from factors
that may be less directly affected by domestic containment
measures, such as government consumption and exports. Both
explanatory variables are expressed as the change in quarterly
average values.

The equations are estimated for a group of advanced and
emerging-market economies for which data are available, and
exclude large outliers, leaving a sample of 43 economies for
private consumption and 49 for GDP. Excluding the outliers
sharpens the results without changing the estimated
coefficients substantially. The sample for private consumption
is smaller given fewer emerging-market economies with
quarterly data for private consumption. In both equations, the
two indicators are strongly statistically significant. This
finding is robust to exclusion of the country outliers.

     Both mobility and stringency are found to have been
     significantly associated with cross-country differences
     in growth outcomes in the second quarter of 2020.
     An increase (tightening) of the Oxford stringency index
     by 10 points is estimated to be associated with a
     reduction of around 1 percentage point in quarterly GDP
     growth, for a given level of mobility. A decline of 10

points in the Google community mobility indicator is
     estimated to be associated with a reduction of around
     1.7 percentage points in quarterly GDP growth, for a
     given level of stringency. For real private consumption
     growth, the respective numbers are 0.6 and 2.8
     percentage points. The larger impact of the mobility
     indicator on consumption growth than on GDP growth may
     reflect the fact that retail and recreational mobility
     is more relevant for household consumption than for
     other economic activities.
     The estimated equations account for roughly 60% of the
     cross-country variation in GDP growth and around 75% of
     the cross-country variation in private consumption
     growth.
     For both GDP and private consumption equations, the
     residuals tend to be on average positive in Asia, where
     containment measures have been relatively mild in some
     countries, but negative in Europe, where more-
     restrictive measures were applied. This may point to
     some potential non-linearities in the aggregate
     relationships between growth, mobility and containment
     measures, or it may indicate that some particular types
     of containment measures, such as full shutdowns, have
     stronger effects than others.

It is too early to know whether the cross-sectional
relationships found for the second quarter of 2020 can be used
to help track output growth throughout the pandemic. However,
initial estimates for GDP growth in the third quarter of 2020
are correlated with quarter-on-quarter changes in mobility
across countries. The estimated relationships for the second
quarter of 2020 also provide a guide for potential
developments in the fourth quarter of 2020, suggesting that
growth may again turn negative in countries that are
tightening confinement measures substantially and experiencing
marked declines in mobility indicators. However, the relation
may be slightly weaker as some potentially hard-hit sectors

have not reopened, or their activity remains subdued after the
first round of containment measures. There may also have been
a growing shift to on-line sales of goods and services, which
might reduce the strength of the association between mobility
and private consumption growth.

References

OECD (2020), “Walking the tightrope: avoiding a lockdown while
containing the virus”, OECD Policy Responses to Coronavirus
(COVID-19), OECD Publishing, Paris.

Hale, T., et al. (2020), “Oxford COVID-19 Government Response
Tracker”, Blavatnik School of Government, Oxford University.

Can Google Trends be used to
track economic activity in
real-time?[1]
by Nicolas Woloszko, OECD Economics Department

A pre-requisite for good macroeconomic policymaking is timely
information on the current state of the economy, particularly
when economic activity is changing rapidly. Given that GDP is
usually only available on a quarterly basis and that monthly
survey-based indicators (such as the Purchasing Managers’
Indices) can become unreliable when changes in economic
activity are abrupt and massive, the current crisis has
prompted a search for alternative high‑frequency indicators of
economic activity. The OECD Economic Outlook (OECD, 2020) as
well as a recent OECD paper (Woloszko, 2020) discuss one such
indicator based on Google Trends, which are used to construct

a Weekly Tracker that provides real-time estimates of GDP
growth in 46 economies covering G20, OECD and OECD partner
countries. To the author’s knowledge, the Tracker is the first
weekly GDP proxy that covers such a large array of OECD and
G20 countries.

What makes Google Trends a powerful tool for economic
predictions is its coverage of a large number of aspects of
economic activity. Data about search behaviour can be
informative about consumption (e.g. related to searches for
“vehicles”, “households appliances”), labour markets
(e.g.“recruitment”), housing (e.g. “real estate agency”,
“mortgage”), business services (e.g.“venture capital”,
“bankruptcy”), industrial activity (e.g. “maritime transport”,
“agricultural equipment”) as well as economic sentiment (e.g.
“recession”) and poverty (e.g. “food bank”). Signals about
multiple facets of the economy can be aggregated to infer a
timely picture of the macro economy.

The relationship between Google Trends variables and GDP
growth is fitted using a machine learning algorithm, drawing
upon expertise in artificial intelligence developed in the
OECD NAEC Innovation Lab. The algorithm (a “neural network”)
extracts relevant information from 250 Google Trends
variables, that each aggregate information about searches by
Google users for thousands a keywords. Using many variables
also reduces the risk related to structural breaks in specific
series, which was highlighted by the failure of the “Google
Flu” experiment.[2]

The model of GDP growth based on Google Trends performs well
across 46 countries in forecast simulations. It captures a
sizeable share of business cycle variations, including during
the global financial crisis, the euro area sovereign debt
crisis as well as around the exceptional volatility associated
with the current COVID-crisis.

The timing of the sharp second quarter downturn in 2020 is

signalled well before more conventional business cycle
indicators and coincides closely with the implementation of
lockdown measures (Figure 1), although the full magnitude of
the negative shock is typically under‑estimated, given its
unprecedented scale. The Tracker suggests that in a number of
countries a partial recovery began towards the end of April,
with impetus slowing from June. Predictions for the third
quarter proved more accurate, with a mean absolute error of
around one percentage point and no evidence of systematic
bias, compared with variation in quarter-on-quarter growth of
between 2% and 18% across the countries in the sample. The
performance of the model over the crisis period is
particularly impressive when assessed for those few countries,
including Canada and the United Kingdom, that publish monthly
estimates of GDP. Latest estimates suggest a further brake on
activity in those, mostly European countries, which imposed
further lockdown measures in November (OECD, 2020).

See the OECD Weekly Tracker of economic activity

References

Butler, D. (2013), When Google                got      flu   wrong,
http://dx.doi.org/10.1038/494155a.

Ginsberg, J. et al. (2009), “Detecting Influenza Epidemics
Using Search Engine Query Data”, Nature, Vol. 457/7232,
1012-1014, http://dx.doi.org/10.1038/nature07634.

Hale, T., et al. (2020), “Oxford COVID-19 Government Response
Tracker”, Blavatnik School of Government, Oxford University.

OECD   (2020),   OECD   Economic   Outlook,   Volume    2020   Issue

2:  Preliminary   version,   OECD  Publishing,        Paris,
https://dx.doi.org/10.1787/39a88ab1-en.

Woloszko, N. (2020), “A Weekly Tracker of activity based on
machine learning and Google Trends”, OECD Economics Department
Working Papers, No. 1634, OECD Publishing, Paris,
https://dx.doi.org/10.1787/6b9c7518-en.

Footnotes

[1] This note is based on an OECD Working Paper (Woloszko,
2020) as well as the Chapter 2 of the OECD Economic Outlook
(OECD (2020), Issue Note 1).

[2] In 2009, Google started tracking influenza epidemics based
on searches for “influenza” or related symptoms (Ginsberg
et al., 2009). In 2013, the experiment was shown to be limited
by media coverage of influenza epidemics during major
outbreaks that were causing surges in Google searches
unrelated to the virus propagation (Butler, 2013).

The impact of the COVID-19
pandemic on sectoral output
by Nigel Pain, OECD Economics Department

The economic impact of the pandemic has varied significantly
across different industries. Monthly economy-wide output data
and the special business surveys being undertaken in some
countries provide a timely indication of the different impact
of the pandemic across types of activity, both in the early
stages of the crisis and subsequently. As shown in the

December OECD Economic Outlook, the containment measures used
in response to the pandemic and underlying changes in consumer
behaviour have both had a significant impact on activity,
particularly in many service sectors.

In the first wave of the pandemic, output fell especially
sharply in countries such as the United Kingdom and France,
where full economy-wide confinement was required for an
extended period (see first figure). By April, retail and
wholesale trade volumes in these countries were over one-third
lower than in February, prior to the pandemic. Retail output
also declined by over one-quarter in Canada. In contrast, many
other countries, particularly in Asia and Northern Europe,
made greater use of targeted measures on regions and sectors
and relied more extensively on effective test, trace and
isolate systems to control the virus.

Service sectors requiring close proximity between consumers
and producers or between large groups of consumers, including
hospitality services, leisure activities and cross-border
travel, were hard hit across all economies, with output
declining by 60-80% in several countries by April. Output in
many other parts of the economy, including manufacturing and
most other market-based services also tumbled, although the
extent of the decline was more varied, reflecting the mix of
containment measures being imposed and differences in
specialisation. Declines in these sectors were also typically
larger in Canada, France and the United Kingdom than in Japan
or Norway.

In the subsequent recovery output gradually picked up in all
sectors, with many containment measures relaxed until
recently, although economy-wide activity and manfacturing
output still remained below pre-pandemic levels as of
September (see first figure). The rebound was particularly
marked in wholesale and retail trade, where output returned
quickly to the immediate pre‑pandemic level, helped by a
rebound in consumer spending.

A weaker recovery occurred in the service sectors most
affected initially, pointing to the risk of persistent costs
from the pandemic in these sectors. Activity in hospitality,
leisure, and transportation, particularly air travel services,
continues to be impacted by physical distancing requirements
and border closures, with output in September remaining 20-25%
below that in February in some countries. The recovery has
also been slow in administrative and support services, a
category of output that includes travel agencies, where demand
is extremely weak.

The special business surveys being undertaken by some national
statistics offices and central banks provide additional

insight into the effects of the pandemic across sectors,
including on workforce arrangements, the extent to which
government support schemes are being used, investment plans,
and corporate finances. Even prior to the tighter containment
measures implemented in the past two months in most European
economies, survey information was already highlighting the
pressures that firms in the hardest hit sectors were facing.

In Belgium, around one-fifth of responding firms indicated
that they could not meet their financial liabilities for more
than three months without receiving additional equity or
credit (see second figure, Panel A). An additional sizeable
share of firms indicated that financial liabilities could only
be met for between three and six months. Such financial
pressures were most evident in the arts and recreation
(leisure) sector, and the accommodation and food services
(hospitality) sector, with around 40% and 30% of firms
respectively indicating that financial liabilities could not
be met for more than three months.

In the United Kingdom, around one-fifth of responding firms
reported that their operating costs were currently exceeding
turnover, with the excess being over 50% in half of these
cases (see second figure, Panel B). A further one-fifth
indicated that operating costs were equal to turnover.
Financial fragilities again appeared to be strongest in the
hardest hit service sectors.

These findings highlight the message in the December OECD
Economic Outlook that flexible and state-contingent government
support remains necessary to help sustain viable firms and
lower the risks of significant long-lasting costs from the
pandemic.

Further reading:

OECD (2020), OECD Economic Outlook, Volume 2020 Issue
2:    Preliminary     version,     OECD     Publishing,
Paris, https://doi.org/10.1787/39a88ab1-en.

The increase in bank deposits
during the COVID-19 crisis:
Possible     drivers      and
implications
By Ane Kathrine Christensen, Alessandro Maravalle and Łukasz
Rawdanowicz, OECD Economics Department

Since the end of 2019, bank deposits of non-financial
corporations (NFCs) have increased rapidly in Japan, the

United States and many European countries, far above the
average growth rates over the same period in the past five
years (figure below, Panel A). In contrast, in the global
financial crisis, corporate deposits declined amid the credit
crunch and, in some cases, a delayed policy response. Deposits
of households have also increased but to a smaller extent;
though still, in many countries, at a faster rate than in the
previous years or at the beginning of the global financial
crisis (figure below, Panel B). This blog, based on the
recently released OECD Economic Outlook, reviews possible
reasons for, and the implications of, the increase in bank
deposits.

Possible    explanations     behind    the
unprecedented increase in bank deposits
Several factors could explain the observed surge in deposits:

     Containment measures made some household purchases
     impossible (Boxes 1.1 and 1.2 in OECD, 2020) at a time
     when incomes were maintained by government support, thus
     increasing saving and bank deposits. This effect should
     be temporary and dissipate as containment measures are
     lifted gradually and pent-up demand is satisfied.
     Indeed, so far, growth in deposits was concentrated in
     the March May period, when strict lockdown was in force
     in many countries. In the following months, until the
     recent reintroduction of containment measures, the rate
     of growth in deposits of both households and NFCs slowed
     in most countries, though it remained above the average
     rate over the same period in the past five years.

     Containment measures are likely to have particularly
     affected consumption of some high ticket services by
     high-income households, stimulating aggregate saving.
     High-income households tend to spend a higher share of
     their income on services that are heavily affected by

containment measures, such as international travel,
restaurants and cultural events. As the restrictions are
likely to persist for some time, so does this motive for
saving.

High uncertainty about the pandemic and future economic
prospects has strengthened motives for precautionary
saving, discouraging investment and purchases of durable
goods. For example, Mody et al. (2012) show that the
change in the unemployment rate – a proxy for variation
in economic uncertainty – boosts precautionary savings.
These effects are likely to be more persistent.

Amid disruptions to revenues, NFCs’ preferences for
holding cash have increased with the aim of raising
their buffers and avoiding liquidity shortfalls. Cash
hoarding has been facilitated by drawing on loan
facilities (e.g. revolving credit lines), issuance of
corporate bonds by large firms (Goel and Serena, 2020),
and by government sponsored loan programmes. In
November, the size of the resources made available to
businesses through government-sponsored loan programmes
(loans and guarantees) was above 10% of 2019 GDP in
Canada, France, Germany, Italy, Japan, Spain and the
United Kingdom. NFCs could have also reduced riskier
financial investments (e.g. in money market funds).

Crisis-related tax deferral measures have helped
households and NFCs to increase liquidity but may also
have encouraged them to set aside money to meet
postponed tax obligations. Tax deferrals are officially
estimated to be high in some countries, exceeding, for
example, 13% of GDP in Italy (including the effect of
the moratorium on payments to private companies) and
close to 5% of GDP in Japan.

Possible implications
A reversal in any of the above factors may result in
additional investment and consumption, boosting aggregate
demand and accelerating the economic recovery. Back of the
envelope calculations show that “excess” deposits are large
relative to pre-crisis business investment, potentially
indicating a sizeable future impact on investment (figure
below, Panel C). For households, “excess” deposits are
relatively small relative to private consumption (figure
below, Panel C), but both household deposits and consumption
are much larger relative to GDP (figure below, Panels E and
F), potentially implying a bigger aggregate impact.

However, there are several reasons why these excess savings
may not boost aggregate private demand beyond negative
confidence effects. For example, the distribution of deposits
may be skewed. If the increase in NFCs’ deposits has been
driven by a few large firms that benefitted from the crisis,

particularly in the technology sector, excess deposits are
unlikely to stimulate future economy-wide investment.
Similarly, if the increase in household deposits has been
mostly driven by high income households with a relative low
marginal propensity to consume, then a reduction in
uncertainty and containment measures would not necessarily
lead to a broad-based strengthening of consumption. Moreover,
firms could use excess deposits to settle payments due to
other companies, creditors or tax authorities.

References

Goel, T. and J.M. Serena (2020), “Bonds and syndicated loans
during the Covid-19 crisis: Decoupled again?”, BIS Bulletin,
No. 29. https://www.bis.org/publ/bisbull29.pdf
Mody, A., F. Ohnsorge and D. Sandri (2012), “Precautionary
Savings in the Great Recession”, IMF Working Papers, No. 42,
International               Monetary               Fund.
https://www.imf.org/external/pubs/ft/wp/2012/wp1242.pdf
OECD (2020), “General Assessment of the Macroeconomic
Situation”, Chapter 1 of OECD Economic Outlook, Volume 2020,
Issue 2, OECD Publishing, Paris.

Damit aus Hoffnung Realität
wird

Laurence Boone,
OECD-Chefvolkswirtin
Auch verfügbar auf Español | Français | Portugués

Zum ersten Mal seit Beginn der Pandemie können wir wieder
hoffnungsvoll in die Zukunft blicken. Durch die Fortschritte
bei der Impfstoffentwicklung und der Behandlung von COVID-19
haben sich die Zukunftsaussichten verbessert und die
Unsicherheit ist gesunken. Die beispiellosen Maßnahmen der
Regierungen und Zentralbanken haben in vielen Sektoren eine
rasche Erholung der globalen Wirtschaftstätigkeit bewirkt. In
einigen Dienstleistungsbranchen wird die Aktivität jedoch
weiter durch die Kontaktbeschränkungen beeinträchtigt. Der
Beschäftigungsrückgang hat sich z. T. wieder umgekehrt, viele
Menschen sind aber immer noch von Unterbeschäftigung
betroffen. Die meisten Unternehmen haben überlebt, häufig sind
sie jedoch finanziell angeschlagen. Ohne die massiven
Stützungsmaßnahmen wären die Auswirkungen auf die
wirtschaftliche und soziale Lage katastrophal gewesen. So aber
konnte das Schlimmste verhindert werden: Der Großteil der
bestehenden wirtschaftlichen Strukturen blieb erhalten und
konnte schnell wieder hochgefahren werden. Viele gefährdete
Menschen, Unternehmen und Länder befinden sich jedoch nach wie
vor in einer prekären Lage.

Die Aussichten sind freundlicher, es gibt aber noch gewaltige
Herausforderungen zu bewältigen. Mittlerweile sind weltweit
1½ Millionen Menschen an oder mit COVID-19 gestorben. In
vielen Ländern wütet bereits die nächste Welle der Pandemie,
während in anderen Ländern die erste Welle noch nicht unter
Kontrolle gebracht wurde. Es steht zu hoffen, dass noch im
Jahresverlauf 2021 wirksame Impfungen allgemein verfügbar
werden oder ein Durchbruch bei der Behandlung von COVID-19
erreicht wird. In der Zwischenzeit wird die Pandemie die
Wirtschaft weiter belasten. Auch in den nächsten Quartalen
wird die Wirtschaftstätigkeit noch durch Kontaktbeschränkungen
und teilweise geschlossene Grenzen beeinträchtigt werden.

Einige Sektoren werden zu alter Stärke zurückfinden, während
in anderen Stillstand herrscht. In Entwicklungs- und
Schwellenländern, für die der Tourismus eine wichtige
Einnahmequelle ist, wird sich die Lage weiter verschlechtern.
Diese Länder werden mehr Unterstützung durch die
Weltgemeinschaft benötigen. Die Konjunktur muss weiter massiv
gestützt werden, gerade weil ein Ende der Gesundheitskrise nun
absehbar ist.

Die Weltwirtschaft wird in den nächsten zwei Jahren an Dynamik
gewinnen. Ende 2021 dürfte die globale Wirtschaftsleistung
wieder das Niveau von vor der Pandemie erreicht haben. Nach
einem drastischen Einbruch in diesem Jahr wird das globale BIP
den Projektionen zufolge 2021 um 4¼ % und 2022 um weitere 3¾ %
wachsen. Durch Fortschritte in der Forschung und
Impfstoffentwicklung, effektivere Kontaktnachverfolgung und
Isolierung sowie Verhaltensänderungen im Privat- und
Geschäftsleben lässt sich das Infektionsgeschehen besser
eindämmen. Dadurch können die Mobilitätsbeschränkungen
allmählich gelockert werden. Dabei spielen die seit Beginn der
Pandemie ergriffenen Maßnahmen zur Stützung von Arbeitsplätzen
und Unternehmen eine wichtige Rolle. Sie tragen entscheidend
dazu bei, dass sich die Konjunktur nach der Aufhebung der
Beschränkungen rasch erholen kann. Dies dürfte zusammen mit
der verringerten Unsicherheit bewirken, dass die erhöhten
Ersparnisse für Konsumausgaben und Investitionen genutzt
werden. Die außerordentliche fiskalische Entlastung, für die
2020 gesorgt wurde und die weiterhin erforderlich ist, wird
sich am Ende auszahlen. Mit dem schrittweisen Wiederhochfahren
von immer mehr wirtschaftlichen Aktivitäten wird sich die
Erholung verstärken und beschleunigen. Dadurch werden die
krisenbedingten Einkommensverluste insgesamt begrenzt.

Die Erholung dürfte von Land zu Land unterschiedlich
verlaufen. Die Weltwirtschaft könnte sich dadurch dauerhaft
verändern. Die Länder und Regionen, die über effektive Test-,
Kontaktnachverfolgungs- und Isolierungsstrategien verfügen und

in denen Impfungen rasch umgesetzt werden können, dürften
vergleichsweise gut abschneiden. Sie werden aber dennoch unter
der weltweiten Nachfrageschwäche leiden. In China, wo die
Erholung früher begann, wird ein kräftiges Wachstum erwartet.
2021 dürfte mehr als ein Drittel des Weltwirtschaftswachstums
auf China entfallen. Die OECD-Volkswirtschaften werden
ebenfalls einen Aufschwung verzeichnen. Mit einem Wachstum von
3,3 % im Jahr 2021 werden sie sich zunächst jedoch nur
teilweise von der gravierenden Rezession des Jahres 2020
erholen. Europa und Nordamerika werden weiterhin weniger zum
weltweiten Wachstum beitragen, als es ihrem Anteil an der
Weltwirtschaft entsprechen würde.

Der Ausblick bleibt extrem unsicher und ist sowohl mit
Aufwärts- als auch mit Abwärtsrisiken behaftet. Eine
günstigere Entwicklung wäre möglich, wenn die Impfstoffe dank
effizienter    Impfkampagnen    und       einer    besseren
länderübergreifenden Zusammenarbeit      schneller weltweit
eingesetzt werden könnten. Wie sich am aktuellen
Wiederaufflammen der Pandemie in vielen Ländern zeigt, kann es
aber auch sein, dass die Regierungen die Wirtschaftstätigkeit
erneut einschränken müssen, insbesondere wenn die Verteilung
wirksamer Impfstoffe nicht zügig vorankommt. Außerdem würde
das Vertrauen leiden, wenn die in die Impfstoffe gesetzten
Hoffnungen    aufgrund   von   Verteilungsproblemen      oder
Nebenwirkungen enttäuscht würden. Die wirtschaftlichen Folgen
könnten gravierend sein und über die Schwächung staatlicher
und privatwirtschaftlicher Schuldner auch das Risiko von
Finanzmarktturbulenzen mit globalen Ausstrahlungseffekten
erhöhen.

Trotz   der   immensen     geld-   und   fiskalpolitischen
Stützungsmaßnahmen führt die Pandemie selbst im günstigsten
Szenario    weltweit    zu  einer   Verschlechterung      der
sozioökonomischen Situation. In vielen Ländern wird die
Wirtschaftsleistung auch 2022 noch rd. 5 % unter den
Vorkrisenerwartungen liegen. Dies lässt erhebliche dauerhafte