The brightening outlook for the global economy will give governments leeway to switch from blanket emergency support to more targeted measures, with a focus on investing, the OECD has said.
The Paris-based organisation said global output would rise 5.8 per cent this year, a significant upgrade from the forecast of 4.2 per cent made in December. Growth of 4.4 per cent the following year would bring most of the world back to pre-pandemic levels of activity, it added.
However, the OECD also warned that the recovery would be uneven and living standards in many developed economies will still fall well short of the levels expected before the pandemic.
The new forecasts suggest that in the US, thanks to its fiscal stimulus and Covid-19 vaccination programmes, economic output at the end of 2022 would be slightly higher than it had projected in November 2019.
The same is true of China and, to a lesser extent, Germany. But output in many European countries, especially those reliant on tourism, will be well below pre-pandemic levels. The shortfall will be even bigger in emerging markets: output in India will be almost 10 per cent below the November 2019 projection.
In the longer term, the damage to the productive capacity of the economy could be worst among G7 countries particularly in the UK, where the scarring effects of the pandemic will be compounded by Brexit, the OECD said.
“As countries transition towards better prospects, it would be dangerous to believe that governments are already doing enough to propel growth to a higher and better path,” said Laurence Boone, OECD chief economist.
The support that many countries had provided for businesses and households had helped protect people’s income and limit damage to the supply side of economies, she added.
But the crisis had underscored the need to improve health and education systems, and to fund digital transformation and the climate transition. As some sectors reopened, with others still restricted, support should become more targeted and “the focus should be on investment”, Boone said.
The biggest risk to the OECD’s upbeat forecasts lay in the failure to ensure that supplies of Covid vaccines reached emerging and low-income countries.
“The global economic and social cost of maintaining closed borders dwarfs the costs of making vaccines, tests and health supplies more widely available,” Boone said.
Another worry was the high level of debt held by small and medium-sized companies, especially in European countries that had channelled support to businesses chiefly through loans, rather than grants.
The OECD said that one approach could be to convert some pandemic-related loans into grants, with repayment conditional on performance and regular assessments of viability.
Boone was more sanguine about the risks of expansionary policies — in the US especially — fuelling persistently high inflation.
Prices could rise in the short term, the OECD acknowledged, due to congestion in ports and bottlenecks in some sectors that were reopening rapidly.
But it took the view that there was still slack in labour markets that would hold wages in check, with the employment rate set to stay below its pre-crisis rate in the median OECD country at the end of 2022.