The bright outlook for the global economy will give governments leeway to shift from comprehensive emergency support to more targeted measures, with an emphasis on investment, the Organization for Economic Co-operation and Development said.
The Paris-based organization said global production would rise 5.8 percent this year, a significant upgrade from the 4.2 percent forecast in December. It added that 4.4 percent growth in the following year would return most of the world to pre-pandemic activity levels.
However, the OECD has also warned that the recovery will be uneven and that living standards in many advanced economies will remain well below levels expected before the pandemic.
New projections indicate that in the United States, thanks to fiscal stimulus and vaccination programs against Covid-19, economic output at the end of 2022 will be slightly higher than expected in November 2019.
The same is true of China and, to a lesser extent, Germany. But production in many European countries, especially those that depend on tourism, will be well below pre-pandemic levels. The shortfall will be even greater in emerging markets: production in India will be about 10 percent lower than the November 2019 forecast.
The Organization for Economic Co-operation and Development said the damage to the economy’s productive capacity in the long term could be worse among the G7 countries and particularly in the United Kingdom, where the devastating effects of the pandemic will be exacerbated by Britain’s exit from the European Union.
“As countries move toward better prospects, it would be dangerous to think that governments are doing enough to drive growth onto a higher and better path,” said Lawrence Boone, chief economist at the Organization for Economic Cooperation and Development.
She added that the support many countries provided to businesses and families helped protect people’s incomes and reduce the damage to the supply side of economies.
But the crisis underscored the need to improve health and education systems, and finance digital transformation and climate change. With some sectors reopening, while others remain in place, support should become more targeted and “the focus should be on investment,” Boone said.
The biggest danger to the optimistic projections of the OECD lies in the failure to ensure that supplies of Covid vaccines reach emerging and low-income countries.
“The global economic and social cost of maintaining closed borders dwarfs the costs of making vaccines, testing and health supplies more widely available,” Boone said.
Another concern was the high level of debt of small and medium-sized companies, especially in European countries that channeled support to companies mainly through loans, rather than grants.
The Organization for Economic Co-operation and Development said one approach could be to convert some of the pandemic-related loans into grants, with repayment conditional on performance and regular assessments of viability.
Boone has been more sanguine about the dangers of expansionary policies – in the US in particular – that are fueling persistently high inflation.
The Organization for Economic Co-operation and Development has acknowledged that prices may rise in the short term, due to congestion at ports and bottlenecks in some sectors that have rapidly reopened.
But it has taken the view that there is still stagnation in the labor markets that will reduce wages, as the employment rate is set to remain below its pre-crisis rate in the middle country of the Organization for Economic Cooperation and Development at the end of 2022.