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Government urged to extend stimulus

The OECD has urged the Australian government to extend stimulus measures and warned that a second wave of infections could derail our economy.

In its latest economic outlook report pointed out that while economic activity collapsed in the second quarter of 2020 due to lockdown, the confinement was less strict than other nations thanks to the relatively mild virus outbreak.

"Massive macroeconomic policy support, including a temporary wage subsidy, is limiting the economic shock. Most economic restrictions are planned to be unwound by July," the report said.

"However, should widespread contagion resume, with a return of lockdowns, confidence would suffer and cash-flow would be strained.

"In that double-hit scenario, GDP could fall by 6.3% in 2020. Even in the absence of a second outbreak, GDP could fall by 5% in 2020."

The OECD said there is ample fiscal space to support the economic recovery as needed and the scarring effects of unemployment should be alleviated through education and training, as well as enhancing job search programmes.

"Firms should continue to be supported, including through expanded loan guarantees, accompanied by expedited insolvency procedures," the OECD said.

"The authorities should be considering further stimulus that may be needed once existing measures expire at the end of the third quarter 2020."

The report suggested the support should focus on improving resilience and social and physical infrastructure, including strengthening the social safety net and investing in energy efficiency and social housing.

Overall, the OECD said Australia has been relatively spared from the COVID-19 outbreak, but warned that a "double hit" scenario will cause considerable damage.

"Demands on the health system have been manageable, helping to contain the number of deaths at comparatively low levels," it said.

"A fast recovery is possible but damage will remain. In the double-hit scenario, the reinstatement of restrictions is assumed to be accompanied by further income support and other policies at a reduced scale."

The OECD forecasts that the economic contraction will be concentrated in the second quarter, but activities will recover as restrictions ease and consumers' options expand.

"However, lost earnings, higher unemployment levels, and ongoing caution temper consumption. Reduced demand, more fragile finances and uncertainty weigh on business investment," it said.

"These headwinds are larger in the double-hit scenario due to prolonged financial stress, together with greater uncertainty, whereas confidence aids a faster recovery in the single-hit scenario."

The report said Australia has ample fiscal space to permit a strong response to a second outbreak or if the recovery falters.

"In particular, some income support measures may need to be extended beyond their September expiry date," it said.

"Continuing efforts to test, track and trace, as well as promoting digital means of accessing healthcare, could improve outcomes and enhance preparedness for further outbreaks."

Read our full COVID-19 news coverage and analysis here.

Read more: OECDAustraliaGDPCOVID-19
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