The recent developments in vaccines for Covid-19 offer glimmers of hope for the global economy, the OECD said on Tuesday, but it warned there were many potential pitfalls in the economic recovery from the pandemic.

Releasing its latest forecasts for the world economy, the Paris-based international organisation predicted a strong rebound from this year’s historic global recession in 2021, but said that the world economy would not fully regain the lost output until the end of next year.

“We’re still in the middle of the worst crisis, but there is now hope,” said Laurence Boone, OECD chief economist. “The challenge is how to get out of the situation fast and with as little damage as possible.”

In the months ahead, it will be most important for countries to speed up the delivery of vaccines and effective test, trace and isolate systems so that restrictions on activity can be gradually lifted, the OECD said. The countries that achieve this most successfully “are likely to perform relatively well [economically]”, it predicted.

By the end of next year, the forecasts indicate that China’s economy is expected to be almost 10 per cent larger than at the end of 2019 as a result of its successful medical and economic response to the pandemic, with South Korea and Indonesia also performing well.

Bar chart of Change in GDP from Q4 2019 to Q4 2021 showing Economic recovery set to be patchy

Economic performance on both sides of the Atlantic lags behind these Asian countries significantly, but the US is expected to regain its lost output by the end of next year, despite its current high infection rate.

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Europe will perform worse, the OECD anticipated: of the continent’s large economies only Germany will come close to regaining its pre-pandemic scale — its economy is expected to be 1.7 per cent smaller in the last quarter of 2021 than the equivalent period of 2019.

Countries in which the pandemic led to long lockdowns will perform worse, including the UK, where the OECD expects output to be more than 6 per cent lower at the end of next year than its pre-pandemic level, and Argentina, which will have lost almost 8 per cent.

Even if the global recovery materialises, the world economy will still be 5 per cent smaller at the end of 2021 than the OECD had forecast a year ago — a clear indication of the growth lost because of the pandemic, and the lower living standards, higher unemployment and greater inequality caused as the economic prospects of the poor and the young are hit hardest.

Line chart of Global GDP index, Q4 2019 = 100 showing Pandemic will leave output lower, despite improved forecasts

The OECD said that governments needed to continue to support their populations where possible with loose fiscal policy and no immediate effort to reduce budget deficits so long as the spending was “cost-effective”.

However, Ms Boone noted that “a striking feature of the outlook is the absence of correlation between the extent of fiscal support and the resulting economic performance” — this suggests “not all measures have been used wisely”.

Where government spending has been used effectively, high levels of public debt should not be a cause for alarm because debt servicing costs are low, the OECD said.

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One important area where spending should be concentrated is in bridging digital divides within and between countries, its report recommended. The pandemic has exposed the inability of education systems in many countries to operate remotely via video link.

Another priority should be to help those who have lost jobs to find new employment. The Netherlands and Scandinavian countries were examples where there has been success in these areas, the OECD said.

The OECD noted the lack of global economic co-operation and said that international action had been less significant than during the global financial crisis of 2008-09, which Ms Boone said “triggered an unprecedented co-operative response”.

In contrast, she said, “the pandemic is the first fully global crisis since World War II [and] it has been answered by massive national responses, but closed borders and little co-operation”.

“Wide, rapid and generous production and distribution of effective medical treatments and vaccines must be organised for all countries” to help the global economy recover from the pandemic, she said.

Via Financial Times