The global economy is poised for a "significant but uneven" recovery this year due to swift policy action and rapid Covid-19 vaccination campaigns in some countries, according to the Organisation for Economic Co-operation and Development.
The world economy, which shrunk by 3.5 per cent last year, is expected to grow by 5.75 per cent this year and by 4.5 per cent in 2022, the 37-member organisation said yesterday in its economic outlook.
The projection for this year is an improvement on the 5.6 growth forecast made by the OECD in March but headwinds remain.
The International Monetary Fund also raised its 2021 global outlook in April from 5.5 per cent to 6 per cent.
A fast-growing manufacturing sector coupled with a strong trade rebound, the gradual resumption of travel, higher consumption and an increase in the number of hours worked are encouraging signs that should “limit the scars” from the crisis, the organisation said.
“The world economy is currently navigating towards the recovery, with lots of frictions,” said OECD chief economist Laurence Boone. “The risk that sufficient post-pandemic growth is not achieved or widely shared is elevated.”
While the global economy has returned to activity levels recorded before the onset of Covid-19, it remains below its pre-pandemic growth path.
In many OECD nations, living standards are not expected to return to pre-pandemic levels by the end of 2022, the report showed.
Looming over the brighter outlook are risks related to the changing nature of the virus, household savings and conditions in emerging and developing economies.
Emerging markets and poor countries are not receiving enough vaccines, exposing them to a “fundamental threat” as they have a reduced capacity to provide support, the OECD said.
A new and much-debated risk is the possibility of higher inflation as central banks and governments pump trillions of dollars to support economies.
Commodity prices have been rising fast while bottlenecks in some sectors and disruptions to trade are creating price tensions, the organisation said.
In addition, “substantial uncertainty” remains because of new, more virulent Covid-19 strains that are increasingly resistant to existing vaccines.
This could result in the reinstatement of strict containment measures, with the ensuing economic costs linked to lower confidence and spending, said the report.
Ms Boone told an online seminar that while some countries are already returning to pre-pandemic levels, it would take some emerging economies five years to do so.
She said governments should lift trade barriers to allow emerging markets to participate in the global supply chain and catch up with advanced economies.
There is also an uneven recovery in the labour markets, with high-skilled jobs growing at a faster pace than low and middle-income ones, exposing vulnerable segments of society and threatening a sustainable recovery, she said.
Amid this uncertainty, governments have been urged to continue adopting flexible and sustainable policies. The OECD called on policymakers to prioritise the quick distribution of vaccines to save lives, preserve incomes and soften the blow of containment measures.
“Stronger international efforts are needed to provide low-income countries with the resources to vaccinate their populations for their own and global benefits,” said the report.
The OECD said shared knowledge and medical and financial resources are essential to addressing pandemic-induced challenges, as are measures to avoid harmful trade bans, especially those affecting healthcare products.
Governments in advanced economies must maintain accommodative monetary policies while temporary overshooting of headline inflation should be allowed, provided underlying price pressures are contained, the organisation said.
Globally, governments provided $16 trillion in fiscal stimulus last year, backed by $9tn in monetary support from central banks. Continued income support for households and companies is warranted until vaccinations lead to a significant easing of restraints on high-contact activities, the OECD said.
This year's strong fiscal stimulus environment is appropriate but moderation appears likely next year, according to the organisation.
Structural reforms aimed at strengthening economic resilience and mitigating climate change are needed to reallocate resources to sustainable sectors, it said.
“As countries transition toward better prospects, it would be dangerous to believe that governments are already doing enough to propel growth to a higher and better path,” said Ms Boone.