A brighter outlook but recovery will be gradual. Faster vaccine deployment and better cooperation for its distribution would boost confidenc...

OECD Economic Outlook, December 2020

A brighter outlook but recovery will be gradual.
Faster vaccine deployment and better cooperation for its distribution would boost confidence and strengthen the pickup but continued uncertainty risks further weakness. Vaccination campaigns, concerted health policies and government financial support are expected to lift global GDP by 4.2% in 2021 after a fall of 4.2% this year. The recovery would be stronger if vaccines are rolled out fast, boosting confidence and lowering uncertainty.

Delays to vaccination deployment, difficulties controlling new virus outbreaks and failure to learn lessons from the first wave would weaken the outlook.

The bounce-back will be strongest in the Asian countries that have brought the virus under control but even by the end of 2021, many economies will have shrunk from 2019 levels before the pandemic.


Moderate growth is set to continue provided the pandemic can be contained effectively

The near-term global outlook remains highly uncertain. Growth prospects depend on many factors, including the magnitude, duration and frequency of new COVID-19 outbreaks, the degree to which these can be effectively contained, the time until an effective vaccine can be widely deployed, and the extent to which significant fiscal and monetary policy actions continue to support demand. Recent developments point to a rising possibility that effective vaccines will be widely deployed towards the end of 2021, improving the prospects for a durable recovery. However, time will be needed to manufacture and distribute the vaccine around the world and ensure it reaches those most at risk. Until then, sporadic and potentially sizeable outbreaks of the virus are likely to continue, as currently being experienced in many Northern Hemisphere economies, necessitating continued containment measures and strategies that differ across countries. Targeted restrictions on mobility and activity will need to be used to address any new outbreaks, accompanied by reinforced personal hygiene measures. Limits on personal interactions are assumed to persist, such as physical distancing requirements and restrictions on the size of gatherings. Restrictions on people crossing national borders are also expected to remain in force, at least partially. Voluntary physical distancing may also continue to restrain household spending.

Living with the virus for at least another six to nine months is likely to prove challenging. The impact of renewed periods of tighter containment measures on activity and confidence will differ across economies, depending on the effectiveness of testing, contact tracing and quarantine arrangements, and the availability of sufficient hospital capacity. However, even where outbreaks are more easily controlled, some of the service sectors most affected by restrictions may be disrupted. With these sectors accounting for a sizeable share of total activity and employment in many economies, adverse spillovers from job losses and bankruptcies into demand in other parts of the economy are likely. Persistent unemployment would also worsen the risk of poverty and deprivation for millions of informal workers. Pre-existing vulnerabilities that have been heightened by the pandemic, such as high corporate and sovereign debt in many countries, and trade tensions between the major economies, could also slow the pace of the recovery if there are prolonged outbreaks of the virus.

Based on the assumptions set out above, a gradual but uneven recovery in the global economy is projected to continue in the next two years following a temporary interruption at the end of the current year. After a decline of 4¼ per cent in 2020, global GDP is projected to pick up by 4¼ per cent in 2021, and a further 3¾ per cent in 2022 (Table 1.1; Figure 1.13, Panel A). OECD GDP is projected to rise by around 3¼ per cent per annum in 2021 and 2022, after dropping by around 5½ per cent in 2020. By the end of 2021, the level of global output is projected to have returned to that at the end of 2019 (Figure 1.13, Panel C), although this is not the case in all countries.

Output is set to remain persistently weaker than projected prior to the pandemic (Figure 1.13, Panel D), suggesting that the risk of long-lasting costs from the pandemic is high. Such shortfalls are projected to be relatively low in China, Korea, Japan and some Northern European economies, at between 1-2 per cent in 2022. The median advanced and emerging-market economy could have lost the equivalent of 4 to 5 years of per capita real income growth by 2022. Initial estimates of potential output growth in the aftermath of the pandemic also highlight the likelihood of permanent costs from the outbreak, with potential output growth in the OECD economies projected to slow to just over 1¼ per cent per annum in 2021-22, some ½ percentage point weaker than immediately prior to the crisis.

Considerable heterogeneity in developments in the major economies is set to persist, both between advanced and emerging-market economies, and between regions (Figure 1.13, Panel B). The economic impact of the pandemic and its aftermath has been relatively well contained in many Asia-Pacific and Northern European economies, reflecting effective containment measures, including well-resourced test, track and isolate systems, and familiarity with precautionary measures to protect against risks from transmissible diseases. In contrast, the measures required to control virus outbreaks in other parts of Europe and other emerging-market economies have been prolonged and involved much deeper declines in output.

- A gradual recovery is underway in Japan, with GDP growth projected to be around 2¼ per cent in 2021 and 1½ per cent in 2022, following an output decline of 5¼ per cent in 2020. Improving external demand will help exports strengthen further, but weak real income growth is likely to hold back private consumption. Strong fiscal measures have helped to cushion activity this year but a tighter fiscal stance in 2021, despite the new supplementary budget announced in November, will slow the pace of the recovery.

- In the euro area, GDP has declined by 7½ per cent this year, and near-term prospects are weak. Output is projected to drop by close to 3% in the fourth quarter of 2020, reflecting the recent reintroduction of stringent containment measures in most countries. Provided virus outbreaks can be effectively contained in the near term, and confidence restored, a moderate recovery is projected in 2021-22. However, area-wide pre-pandemic output levels may not be fully regained until after 2022. After sizeable support this year, fiscal policy is set to be broadly neutral in 2021 and mildly restrictive in 2022 despite the modest outlook, but Next Generation EU grants should help support investment in the hardest-hit economies during the projection period.

- A solid recovery is expected to continue in China, with GDP growth projected to be around 8% in 2021 and 5% in 2022. Monetary stimulus is now being withdrawn but fiscal policy is set to remain supportive. Strong investment in real estate and infrastructure, helped by policy stimulus and stronger credit growth, and improved export performance are driving the pick-up, and helping to boost external demand in many commodity-producing economies and key supply-chain partners in Asia. Progress in rebalancing the economy has however slowed, and significant financial risks remain from shadow banking and elevated corporate sector debt.

- The impact of the pandemic in many other emerging-market economies has been prolonged relative to that in China, reflecting difficulties in getting the pandemic under control, high poverty and informality levels, declining tourist inflows, and limited scope for policy support. Gradual recoveries are now starting in most economies, but the shortfalls from expectations prior to the pandemic are likely to remain sizeable.

- Output in India is projected to rise by 8% in FY 2021-22 provided confidence improves, after having declined by 10% in FY 2020-21. Further reductions in policy interest rates should help to support demand, if the current upturn in inflation subsides, but there is limited scope for additional fiscal measures, and pressures on corporate balance sheets and banking sector bad loans are also likely to restrain the pace of the upturn.

- A gradual recovery is projected to continue in Brazil, with GDP rising by 2½ per cent in 2021 and 2¼ per cent in 2022, after contracting by 6% this year. Strong fiscal and monetary support have helped to protect incomes and prevent a larger output decline this year. High unemployment and the planned withdrawal of some crisis-related fiscal measures will temper household spending in 2021, but historically low real interest rates and favourable credit conditions should help investment to strengthen.

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