The prospect of a number of COVID-19 vaccines becoming widely available next year has lifted hopes for a faster recovery, but policymakers will need to retain both public health and fiscal support while acting decisively for the momentum to pick up, according to the OECD’s latest Economic Outlook.
The OECD warned in its June Economic Outlook that a second wave of infections at the end of the year could knock an initial rebound off course. Europe and North America are now bearing the brunt of a resurgence of the virus, stalling the recovery. Global GDP in the fourth quarter of 2020 is expected to be 3% below the same quarter last year, while for the Euro area and the US the decline is projected to be 7.3% and 3.2%, respectively.
Activity will continue to be restricted with social distancing and partly-closed borders most likely remaining through the first half of 2021, the Economic Outlook says. The global economy is expected to gain momentum only gradually, as vaccines are deployed throughout OECD countries in the course of 2021. After falling sharply by 4.2% this year, world GDP is projected to rise by 4.2% in 2021, with China expected to account for over a third of that growth.
The recovery will be uneven across countries and sectors and could lead to lasting changes in the world economy. Countries with effective testing, tracking and isolation programmes and where effective vaccinations can be distributed rapidly should perform relatively well, but a high degree of uncertainty persists.
The Outlook provides both upside and downside risks to its main projections. The release of pent-up demand and accumulated savings may reinforce a rebound if vaccines become available faster and more widely, boosting global growth to around 5% in 2021. But confidence may be hit if problems arise with the distribution or unexpected secondary effects of the vaccines and if the lessons from the first two waves of the pandemic are not learnt. In this scenario, global growth in 2021 would be lowered by 2¾ percentage points.
Presenting the Economic Outlook with OECD Chief Economist Laurence Boone today, Secretary-General Angel Gurría said: “There is hope, but that hope needs to be turned into reality. The pandemic is a global problem. International co-operation is needed now more than ever.”
“Building back better requires leadership and action to build on the promises of vaccines, and to relaunch multilateral negotiations on trade, climate and digital standards to pave the way for a more sustainable growth and a society where opportunities are available for all.”
Laurence Boone said: “With the prospect of vaccines and better virus management, the picture for the global economy is looking brighter, but the situation remains precarious, especially for the low-skilled and for struggling small businesses.”
“Governments have been vindicated in the support they provided to shield people and firms. With rock-bottom interest rates expected to persist, governments can and need to sustain it to prevent long-term scarring effects of this crisis. The economic consequences will be with us for years to come. Governments must address decisively the effects on the most vulnerable, especially children and the young.” (See Summary handout for Economic Outlook news conference.)
The Outlook shows how the crisis has worsened inequality, hitting the most vulnerable in society the hardest. High levels of unemployment, particularly among the low-skilled and young, risk persisting for years. Many children, especially those from disadvantaged backgrounds, have fallen badly behind in their education during lockdowns, further limiting their opportunities in the future.
For millions of small and medium-sized businesses – the main drivers of job creation – mounting debts and continued uncertainty are putting their survival in jeopardy. The Outlook says declines in firms’ profits will hit their ability to service debts in the future and undermine their capacity to invest. Young and small as well as less productive companies are expected to be badly affected, in addition to those in the accommodation and food, transport, and arts and entertainment sectors that are severely affected by the lockdown measures.
The economic damage would have been even worse without the massive government financial support now in place to help people and companies weather the shock. With very low interest rates expected to continue for some time, exceptional spending can and should continue until the recovery gains momentum, the OECD says. Policy action should become better targeted to where it is needed most and to strengthen the recovery.
The balance of spending should gradually move towards more investment in health, education and infrastructure, encouraging a shift to a greener and more digitalised economy, it adds.
The Economic Outlook calls for determined action from policymakers across a number of fronts:
- Strengthen public health services by investing in health workers, prevention strategies and capacity. Implement effective test, trace and isolate programmes. Start planning vaccination campaigns now. Co-ordinate internationally to ensure affordable vaccines and treatments are available wherever needed.
- Support the vulnerable by expanding social safety nets and improving training for youth and the low-skilled. Ensure that children from disadvantage backgrounds are equipped for the digital age to give them equal opportunities.
- Support businesses by providing grants and equity rather than loans adding to existing debt. Assist companies to invest in their future by, for instance, facilitating the adoption of digital technology.
The Economic Outlook warns that corporate debt is reaching levels last seen in the global financial crisis a decade ago, raising the risk of insolvencies but also cutting firms’ capacity to invest, which would weaken a broader economic recovery.