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The brighter prospects for the world economy will give governments room to move from general emergency support to more specific measures, with a focus on investment, the OECD has said.
The Paris-based organization said world production would increase by 5.8% this year, a significant improvement over the 4.2% forecast made in December. Growth of 4.4% the following year would return most of the world to pre-pandemic activity levels, he added.
However, the OECD also warned that the recovery would be uneven and that the standard of living in many developed economies will remain well below pre-pandemic levels.
New forecasts suggest that in the United States, thanks to its fiscal stimulus and Covid-19 vaccination programs, economic output by the end of 2022 would be slightly higher than expected in November 2019.
The same goes for China and, to a lesser extent, Germany. But production in many European countries, especially those dependent on tourism, will be well below pre-pandemic levels. The shortfall will be even greater in emerging markets: production in India will be almost 10% below the November 2019 forecast.
In the longer term, the damage to the productive capacity of the economy could be worse among G7 countries, especially in the UK, where the effects of the pandemic will be exacerbated by Brexit, the OECD said.
“As countries move into better prospects, it would be dangerous to believe that governments are already doing enough to drive growth towards a higher and better path,” said Laurence Boone, chief economist at the OECD.
The support many countries had provided to businesses and households had helped protect people’s incomes and limit damage alongside the supply of economies, he added.
But the crisis had underscored the need to improve education and health systems, and fund digital transformation and climate transition. As some sectors reopened, with others still restricted, support should be directed more and “the focus should be on investment,” Boone said.
The biggest risk to the OECD’s optimistic forecasts lies in the failure to ensure that the supply of Covid vaccines reaches emerging and low-income countries.
“The global economic and social cost of keeping borders closed decreases the costs of making vaccines, testing, and health supplies more available,” Boone said.
Another concern was the high level of debt of small and medium-sized enterprises, especially in European countries that had channeled support to enterprises mainly through loans, rather than subsidies.
The OECD said one approach could be to convert some pandemic-related loans into grants, with repayment conditional on performance and periodic feasibility assessments.
Boone was more cautious about the risks of expansionary policies, especially in the U.S., which fueled 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 rapidly reopening.
But he opined that there was still a slowdown in labor markets that would keep wages under control, as the employment rate will remain below the pre-crisis rate in the middle OECD country by the end of 2022.
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