Gradual improvement after historical impact – E24

The Organization for Economic Co-operation and Development (OECD) now expects a 4.5 percent drop in the world economy this year. It’s a historically high drop, but 1.5 percentage points better than the organization feared before the summer.

“Estimates are based on the fact that sporadic local outbreaks will continue and be addressed through targeted local measures rather than national closures, and that vaccination is not expected to be widely available until the end of 2021,” the OECD writes.

In the second quarter of the year, global growth is 10 percent below the level of the same time last year. The OECD calls it “a sudden shock unprecedented in modern times.”

The organization now expects a gradual recovery over the next 18 months, such that growth next year will rebound to 5 percent in 2021, 0.2 percentage point weaker than previously estimated.

The OECD also notes that growth in most countries is likely to be lower by the end of 2021 than in 2019, clearly showing the risk of long-term costs associated with the pandemic.

Big differences between countries

It is emphasized that the uncertainty is great and that there are significant differences between the different countries. While China, the United States and Europe are upside down, India, Mexico and South Africa are weaker than expected.

If the threat from the corona diminishes faster than expected, it could provide a significant boost to global activity in 2021.

But the OECD places greater emphasis on downside risk. A stronger resurgence of the virus, or tighter infection control measures, could cut 2-3 percentage points of global growth next year, leading to higher unemployment and a longer period of weak investment.

This downward scenario will also increase the probability of a recurrence in financial markets (stock market crash) and more bankruptcies. At the same time, it will probably lead to interest rates falling as much as possible, while the bullish scenario will probably not result in such big swings.

The OECD is clear that both central banks and governments must maintain their support to get the economy back on track so that premature adjustment does not slow growth.

Otherwise, the OECD calls for borders to be kept open for the free flow of trade, investment and medical equipment, which is essential to curb and suppress the virus in all parts of the world and accelerate economic recovery.

The OECD has 37 member countries, including Norway.

OECD Economic Outlook, June 2020