The resurgence of the COVID-19 pandemic has weakened global recovery to a large extent. It could get a lot worse if governments withdrew support too soon. It could worsen further if the government fails to deliver effective vaccines, the OECD warned.
The group, an organization based in Paris, cut its 2021 global growth forecast to 4.2% from 5% in September. It said that a pattern of outbreaks and lockdowns is likely to continue for some time. It will also likely come with rising risks of permanent damage.
In particular, there were large downgrades for the euro area and the U.K. Forecast for the U.K. was slashed to 4.2% from 7.6%. The U.S. projection was lowered from 4% to 3.2%.
OECD Chief Economist Laurence Boone said, the policy still has a lot to do. If public health or fiscal policy waivers, then the loss of confidence and a more depressing outlook will be seen.
The renewed call for sustained government action highlights the frailty of the world economy caused by the pandemic. The sharp shock of the early months of the pandemic has prolonged, causing a major slump in many regions.
Despite the recent positive news on vaccines, central bankers remain wary. Significant challenges and uncertainties remain, warned Federal Reserve Chair Jerome Powell on Monday.
A Successful Covid-19 Treatment, a Deciding Factor
One of the deciding factors in the trajectory of the recovery is the successful deployment of a Covid-19 treatment. It would finally end lockdown measures, allow businesses to reopen and people to return to work.
OECD said, so much hope is pinned on this that delays could have a shattering impact.
Boone said the toll on the economy could be severe. It is, in turn raising the risk of financial turmoil from fragile sovereigns and corporates with global spillovers, he added.
There’s also an increased risk of divergence between different regions. This could develop into lasting changes in the world economy, the OECD said.
Europe and North America will contribute less growth than their weight in the economy next year. Furthermore, China will account for more than a third of the global expansion.
According to the report, governments should continue to support their economies beyond the end of lockdown measures. Moreover, avoid “fiscal cliffs”.
While public debt has risen, the OECD pacified worries, saying that borrowing costs are low.
However, it said, some spending has been wasted. It noted an absence of correlation between the extent of fiscal aid and the resulting economic performance.
Government support should be targeted at vulnerable companies and groups that have suffered particularly in the crisis. These include small firms that are more likely to go out of business. Moreover, low earners and poor households with limited safety nets.
Boone said the pandemic would have damaged the socio-economic fabric of countries worldwide. That is despite the huge policy band-aid, even in an upside scenario, he said.
- Trading Instrument