Monday, January 24

OECD Warns of Loss of Momentum and Growing Imbalances in Global Recovery

The world economy continues to recover, but this recovery is losing momentum and is becoming increasingly unbalanced, as warned by the Organization for Economic Cooperation and Development (OECD), which has revised down its projections for the main world economies, although it remains “cautiously optimistic.”

“Our central scenario is for the global recovery to continue, with the world coping better with the pandemic and monetary and fiscal policies remaining generally favorable throughout 2022,” said the OECD chief economist. Laurence Boone, in the presentation of the report ‘Economic Outlook ‘.

In this way, the ‘think tank” of advanced economies expects world GDP to grow in 2021 at a rate of 5.6%, one tenth less than previously anticipated, while maintaining the forecast that growth in 2022 will be 4.5% and that the expansion will moderate a year later to 3.2%.

In his analysis, the OECD warns of the emergence of “large imbalances” due to marked differences in recovery between countries, reflecting national health conditions, the policy mix, and the composition of the sector, as well as labor shortages in some sectors and the persistent gap between supply and demand for some goods, along with rising food and energy costs, leading to higher and longer-lasting price increases than expected.

In this regard, the OECD is confident that as the health situation improves, demand stabilizes and people return to the labor market, supply bottlenecks should disappear, thus forecasting inflation to gradually recede to around 3% by 2023 in the group of countries, pointing out that, in the current circumstances, the best thing that central banks can do is to wait for supply tensions to diminish, indicating that they will act if necessary.

“These imbalances create uncertainty and more risks to the downside than upward,” said Boone, who has expressed the concern of the organization “more about the use that is made of the debt than about its level”, adding that, although the increase in indebtedness during the pandemic was necessary, “now is the time to refocus fiscal support on productive investment that will drive growth.”

In this sense, he criticized that “detailed medium-term plans for public finances are lacking”, underlining that work on them should begin now, since a clear, solid and responsible fiscal framework would strengthen confidence that growth will increase,
thus reducing imbalances and risks.

Likewise, the chief economist of the OECD He has criticized that “there is too much talk and not enough measures are taken with regard to climate change”, which he has considered “alarming”, since the political uncertainty in this regard is hampering investment in clean energy and infrastructure.

The longer governments wait, the greater the risks of an abrupt transition in which energy prices are higher and more volatile, “he added.

New Omicron variant

On the other hand, even though the projections of the OECD were carried out before it was detected, the chief economist of the organization has recognized the concern that the new omicron variant of the Covid virus represents by adding “new levels of uncertainty” that may pose a threat to the recovery.

In this sense, Laurence Boone has pointed out that, although there is the option that the new variant ends up being like others, there is also another worse scenario in which more protections have to be taken and in which confidence would be affected, demand it could slow down and bring price pressures.

“The health situation is a concern whether delta, omicron or any other variant,” Boone said at a press conference, underlining that “vaccinating more people is the most important priority” and the current uncertainty about the new variant is a reminder that “the job is not done yet.”

New forecasts

In the case of most countries in the OECD, the organization expects growth between 2022-23 faster than estimated potential, which will allow many of these economies to regain, or even exceed, the GDP growth path that was projected before the onset of the pandemic.

However, for economies outside the OECD “The medium-term outlook is more heterogeneous”, since, although GDP growth rates will generally be above those of advanced countries, projected GDP growth remains well below the
expected path before the pandemic.

Among the main economies analyzed, the OECD has cooled its expectations for the United States, which will rebound this year by 5.6%, four tenths less, to moderate the rate of expansion in 2022 to 3.7%, two tenths below the previous forecast, and grow by 2, 4% in 2023.

In the case of the euro zone, the new forecasts for ‘think tank‘point to growth of 5.2% in 2021, one tenth less, and 4.3% in 2022, three tenths below the previously estimated, with a projected growth of 2.5% for 2023.

Outside of the OECD, the organization anticipates that China’s GDP growth will reach 8.1% this year to moderate in 2022 and 2023 to 5.3%, while in the case of India, it expects the economy to grow 9.4% in 2021 and 8.1% in 2022, moderating the rate of expansion to 5.5% a year later.