Executive summary

The coronavirus pandemic has hit the economy hard. Lockdown orders forced many businesses to shut down and activity dropped sharply (Figure 1). Large numbers of people became unemployed or dropped out of the labour market, unwinding a large part of the 10-year progress made to restore full employment. The downturn hit at a time when the economy was performing well, with wages gaining momentum, businesses generating large earnings, and banks posting healthy capital buffers.

With cases of COVID-19 increasing steadily, efforts were made to control the pandemic. State-level shelter-in-place orders requiring households to remain at home and businesses to close have helped to flatten the curve of new cases, but the death toll has continued to mount. Progress was made to slow the contagion but, as in other countries, the outbreak will take a long time to stop.

The economic impact of the coronavirus crisis is substantial. Output has slumped, and only a partial recovery is likely (Figure 2 and Table 1). Businesses that are sensitive to distancing will recover only gradually and to the extent that customers regain confidence sufficiently to return to their former consumption patterns.

Fiscal space and room for monetary policy easing were available when the crisis hit and rapidly deployed to support the economy. Fiscal policy has responded forcefully to the crisis and provided welcome financial relief to unemployed workers and struggling businesses during the first phase of confinement. With the exit from confinement well underway, policy actions should now focus on reviving the economy.

This fiscal support should be extended as needed, including in case of a second wave, which will cause budget deficits to swell (Figure 3). These deficits have been easily financed thanks to abundant liquidity and bond purchases by the Federal Reserve. However, they will add to debt challenges in the long run as ageing will put mounting pressure on pension and healthcare spending. Concrete action to reform these entitlements and raise revenue will be needed to ensure long-run sustainability.

Monetary policy also responded quickly and forcefully. Interest rates were reduced to 0-0.25%, quantitative easing and forward guidance were restarted, and massive Fed lending programmes were created to provide cash relief to businesses. In the case of a further weakening, monetary policy can react by augmenting forward guidance and expanding asset purchases. The outlook is uncertain for inflation although in the short run it is likely to continue to undershoot the Fed’s target.

The banking sector appears to have withstood the initial shock. A number of vulnerabilities have emerged and credit markets experienced considerable stress, but this was quickly brought under control. Nonetheless, high corporate leverage creates a risk for the banking system, which will become more visible as government support is withdrawn. Continued support could be considered if liquidity and solvency problems emerge swamping the bankruptcy system.

With the shuttering of many businesses, unemployment has surged and many have left the labour force. The unemployment rate jumped to almost 15% in April before declining and the employment to population ratio fell to the lowest level on record. The prime age participation rate has fallen back to levels last seen in the 1980s. While many workers appear to have retained an attachment to their former firms, many have not.

Bringing people back into work quickly is important. Not only would this help households recover, but also preserve the positive gains from the long expansion in sharing the benefits more widely. A robust recovery from the current downturn will limit the damage to the labour market, but additional effort will be needed to make sure groups often on the margins of the labour force are not left behind. Sustained high levels of unemployment and the drop in prime age participation can be difficult to reverse. Government policies to help workers re-enter employment quickly will be crucial.

The recession risks leaving behind a long-lasting negative economic impact. Reforms are essential to lift productivity growth and ensure that all benefit from future growth. Productivity has been sluggish for a variety of reasons. Policies are needed to support labour mobility and competition to help workers and businesses avoid scarring effects and fully recover from the crisis.

The regulatory process in the United States has a large state and local element. This can be a strength but in some cases this has led to uncoordinated policies, contributing to weaker labour market dynamism. When regulations impede the ability of workers to change jobs, which have large payoffs for workers with low incomes or skills, these policies can have important distributional impacts.

Occupational licensing and non-compete agreements are impediments to moving to new employers. They also hinder workers finding good jobs. These types of labour market regulations both cover around one fifth of workers (Figure 4). Regulation is needed to protect safety and ensure quality of services, but it also creates entry barriers and reduces competition with important costs for job mobility, earnings and productivity growth.

Low-skilled workers and disadvantaged groups tend to be particularly affected by these barriers. The states are mainly responsible for regulation concerning occupational licensing and non-compete agreements and the variation across states is similar to the variation across the European Union. The requirements vary widely by state both in whether an occupation is covered at all and in how restrictive the requirements are. Reducing the restrictive impact of occupational licensing and the use of non-competition covenants could help to circumvent the secular decline in dynamism. However, attempts to reform often face stiff opposition from associations of professionals.

A further barrier to labour mobility is the housing market. Housing supply has barely kept pace with population growth and lags other OECD countries . This is partly the result of restrictive land use policies at the local level making it difficult to expand housing supply, particularly in and around successful cities. Cities where land use policies are less restrictive also tend to be cities where productivity growth is stronger and where people change jobs more frequently. Better coordination of housing, land use and transport policies are needed to help cities and their surrounding areas realise their potential and grow sustainably.

Ensuring competition is a priority for promoting productivity growth. While competition remains intense in some markets, such as retail trade, there are some concerns in other industries, notably information technology, media and health. In some cases, regulatory barriers appear to contribute to sluggish firm entry. Trade policy has the potential to reduce barriers to competition and to support the recovery. In particular, barriers to trade in services appear to hold back the economy.

Environmental performance and energy security has continued to improve along some dimensions. These include high air quality and a large reduction of greenhouse gas emissions notably with growing production and use of natural gas, rising renewable energy capacity, steady nuclear generation and the decline of coal.

Greenhouse gas emissions have been falling since 2005. Emissions declined by around 12% by 2018. Improvements in technology, increased supply of natural gas as well as state and local policies have begun to reduce greenhouse gas emissions. A switch in electricity production from coal to natural gas and renewables has made an important contribution to emission reductions (Figure 6). Recently, electricity production by renewables over a month outpaced coal for the first time, although overall for the year coal remains a more important source of generation capacity. As this process runs its course further reductions will be difficult to attain without policy support, which should prioritise the most cost-efficient ways to reduce emissions as part of the Administration’s all fuels and technologies approach.

Disclaimer

This document, as well as any data and map included herein, are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

Note by Turkey
The information in this document with reference to “Cyprus” relates to the southern part of the Island. There is no single authority representing both Turkish and Greek Cypriot people on the Island. Turkey recognises the Turkish Republic of Northern Cyprus (TRNC). Until a lasting and equitable solution is found within the context of the United Nations, Turkey shall preserve its position concerning the “Cyprus issue”.

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