Global Plastics Outlook

Annex B. Modelling the economic effects of the COVID-19 pandemic and government response measures

1.1. Scenario assumptions

The implications of the pandemic and lockdown measures are determined by comparing a counterfactual pre-Covid baseline scenario, i.e. the pre-Covid projection, with a scenario where the Covid-related shocks are included. The impacts of the COVID-19 pandemic and government response measures are based on the following modelling assumptions; see (Dellink et al., 2021[1]) for more details:

• Increases in regional unemployment levels in 2020 are based on the OECD Economic Outlook 108 (OECD, 2020[2]), the updates on GDP forecasts in the Interim Outlook (OECD, 2021[3]) and the IMF Economic Outlook for the countries that are not covered by the OECD forecasts (IMF, 2020[4]). For the few countries missing in both databases, ad-hoc assumptions are made based on effects in similar countries.

• Sectoral demand shocks are implemented for 2020 following Arriola and Van Tongeren (2021 forthcoming[5]). For energy sectors, the shocks are based on (IEA, 2020[6]). No demand shocks are included for the plastics producing sectors.

• Short-term government stimulus packages as provided in 2020 are implemented as a reduction in capital and labour taxes for firms, and as a reduction in income taxes for households. These are based on Arriola et al. (2021 forthcoming[5]).

• Trade shocks are implemented as an increase in the costs of international trade (“iceberg costs”), with a differentiation between services sectors and agriculture and manufacturing. This mimics the trade shocks in Arriola et al. (2021 forthcoming[5]).

• Reductions in regional labour productivity reflect productivity losses during lockdown and is included crudely as a uniform decline in productivity in all sectors and regions, based on Arriola et al. (2021 forthcoming[5]).

• Finally, regional total factor productivity shocks reflecting the combined effects of all elements not captured explicitly above are added based on the macroeconomic decline in GDP OECD (2020[2]). This approach ensures that the immediate effects of the pandemic on the macro economy are scaled to reach the GDP growth rates for 2020 as forecast by OECD (2020[2]) and by the IMF for the countries that are not covered by the OECD forecasts (IMF, 2020[4]).

1.1. Economic impacts

Increased unemployment, reduced labour productivity, a collapse in demand for certain commodities and higher trade costs all depress economic activity. This is only partially compensated by government support to firms and households. The result is a significant contraction of global GDP in 2020, with the annual global GDP growth rate dropping from around +4% in 2019 to -3.5% in 2020 (OECD, 2021[3]). For 2021 and beyond, the projections for global GDP are more optimistic and foresee a gradual recovery; this will be covered in Volume 2 of the Global Plastics Outlook (OECD, forthcoming[7]).

The pandemic is truly global and affects all economies. Moreover, economic integration means that regional economic effects propagate through all economies. Thus, GDP levels in 2020 were well below those of 2019 in all regions except China (Figure A B.1, left panel). However, in a normal year GDP levels would grow, and thus the deviation between realised GDP in 2020 and the level for 2020 that was projected pre-Covid, i.e. the 2019 GDP levels plus the expected growth rate for 2020, is larger. Thus, even though the Chinese economy recovered rapidly from the first shock to the economy, the GDP growth rate was much lower than anticipated.

All other regions had more substantial losses in GDP, with the largest drop compared to 2019 in the European Union and India (cf. OECD (2021[3])), and relatively large losses compared to the pre-Covid projection on most emerging economies as a year of expected high growth was wiped out. Furthermore, global trade collapsed thereby depressing economic activity in emerging economies that rely heavily on exports as a source of growth.

On balance, in 2020 GDP in the OECD countries was 5% below 2019 levels (7% below the pre-Covid projection), while in non-OECD countries the average reduction from 2019 levels was smaller at 2% (6% below the pre-Covid projection).

The structure of the economy plays a key role in how strong the macroeconomic effects of the pandemic are. Parts of the services sectors were severely hit by the pandemic, especially the accommodation and food services sector (Figure A B.1, right panel). The reductions in demand for fossil fuels were quite large, not least through the effects of the lockdown measures on transport. Electricity demand also declined, especially in production, as firms close down temporarily, but less than fuel use. Construction activities and motor vehicle sales are among the most severely affected.

Figure A B.1. The COVID-19 pandemic and lockdown measures have reduced GDP across the world and reduced output in most sectors

Note: Sector names are associated with the products they produce.

Source: OECD ENV-Linkages model and Dellink et al. (2021[1]).

Other manufacturing sectors are only indirectly affected: while there was – at least in the model simulations – no direct shock to demand for the commodities of these sectors, the slowdown in other sectors, and the reduction in consumption levels dragged these sectors down as well. This includes for instance textiles, electronics and the chemical sector, as well as plastics and rubber production.

The only sector that is estimated to have a short-term increase in output is pharmaceuticals (as well as some subsectors that are aggregated in larger sectors in the modelling, such as e-commerce).1 When compared to 2019, the health sector also grew somewhat, albeit less than in the pre-Covid projection.

References

[5] Arriola, C., P. Kowalski and F. Van Tongeren (2021 forthcoming), Assessment of the Covid-19 pandemic: insights from the METRO model, OECD.

[1] Dellink, R. et al. (2021), “The long-term environmental implications of COVID-19”, OECD Environment Working Papers, No. 176, OECD Publishing, Paris, https://doi.org/10.1787/123dfd4f-en.

[6] IEA (2020), World Energy Outlook 2020, OECD Publishing, Paris, https://dx.doi.org/10.1787/557a761b-en.

[4] IMF (2020), World Economic Outlook, October 2020: A Long and Difficult Ascent, International Monetary Fund, Washington, D.C., https://www.imf.org/en/Publications/WEO/Issues/2020/09/30/world-economic-outlook-october-2020 (accessed on 22 January 2021).

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

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

[7] OECD (forthcoming), Global Plastics Outlook, Volume 2, OECD.

Note

← 1.  The pharmaceuticals sector comprises around 0.7% of total output of the global economy, and above 1% in the European OECD countries (on average).