global economics

The global economy recovery is largely dependent on one critical factor; the speed and effectiveness of the vaccination rollout across the world.

The OECD’s latest Interim Economic Outlook explains that a fast vaccination rollout will also need to respect necessary health and social distancing measures.

According to the OECD, economic activity has picked up in many sectors, and otherwise adapted to pandemic restrictions in recent months.

While global vaccine deployment is uneven, it is starting to gain some momentum.

Government fiscal stimulus measures, especially in the US, are also likely to provide a significant boost to economic recovery.

However, the OECD notes that the pandemic is widening gaps in economic performance between countries and sectors, as well as widening social inequalities.

Vulnerable groups are especially affected by the economic ramifications of the pandemic, with the risk of long-term damage to job prospects and reduced living standards for many.

Within their Interim Economic Outlook, the OECD is calling for a faster rollout of the vaccination programme worldwide, along with faster, better targeted fiscal stimulus measures designed to support output and confidence.

Governments also need to maintain income support for people and businesses who are hardest hit by the pandemic, while laying the groundwork for a sustainable economic recovery.

Angel Gurría, OECD Secretary-General, said:

“Speed is of the essence. There is no room for complacency. Vaccines must be deployed faster and globally. This will require better international co-operation and co-ordination than we have seen up to now. It is only by doing so that we can focus our attention on building forward better and laying the foundations for a prosperous and lasting recovery for all.”

Turning to their forecasts, the OECD expects global GDP growth of 5.6% this year, which is up by more than 1% compared to its December prediction. It also expects to see global growth of 4% next year.

The OECD believes that global economic output will be restored to its pre-pandemic levels by the middle of the year, but the pace and duration of the economic recovery will depend on the vaccination rollout and emerging variants of the virus.

Improved global growth projects would materialise if the production and distribution of vaccines could accelerate. It would also support improved growth forecasts if vaccine deployment was coordinated around the world, able to get in front of virus mutations.

The OECD says, should this happen, virus containment measures could be eased more quickly. However, if the vaccination programme is not sped up, and infection rates remain high or new variants become more widespread, requiring changes to current vaccines, then consumer spending and business confidence would take a hit.

Within their central scenario, the OECD expects US growth to be 6.5% this year, which is an upwards revision on its December forecast. Stronger growth in the US is forecast due to the large-scale fiscal stimulus and its sustained pace of vaccination.

Stronger economic growth in the US should support a better global economic recovery.

In the euro area, fiscal stimulus is smaller and the vaccination programme rollout slower. As a result, the OECD forecasts growth of 3.9% this year, only modestly better than the expectation at the end of last year.

There are brighter prospects in the Asia Pacific region, especially in China where growth this year is forecast at 7.8%.

The OECD forecasts growth this year of 2.7% in Japan, 3.3% in Korea and 4.5% in Australia.

There is likely be a more moderate economic recovery in the emerging market economies of Latin America and Africa, due to a resurgence in the virus, slow vaccine deployment and limited scope for further policy support.

Presenting the Interim Economic Outlook, OECD Chief Economist Laurence Boone said vaccination programmes and stimulus measures should work hand in hand.

“Widespread vaccination of the adult population is the best economic policy available today to get our economies and employment growing again,” she said. “If we are at war with the virus then we need to put vaccine production on a war footing, provide the necessary resources and speed up deployment across the world.”

“If we don’t get enough people vaccinated quickly enough to allow restrictions to be lifted, the recovery will be slower and we will undermine the benefits of fiscal stimulus,” she added.

While there is positive news about better than previously expected economic recovery, this also raises the prospect of rising price inflation. However, the OECD thinks underlying price pressures generally remain mild in advanced economies.

Inflation could rise further in emerging market economies.

There are higher levels of public debt globally, but the cost of servicing this debt remains sustainable in most OECD economies.

According to the report, the vital support provided by governments to preserve jobs and businesses should stay in place for now, while economies remain fragile and hampered by pandemic restrictions.

The OECD says governments need to pay particular attention supporting young people and lower-skilled workers, to avoid a repeat of the long-term damage to job prospects caused by the global financial crisis.