Jeph Ajobaju, Chief Copy Editor
There is a likely expansion of the global economy by 5.6 per cent this year, according to the Organisation for Economic Cooperation and Development (OECD), a scenario made brighter with America pumping whopping dollars into recovery.
President Joe Biden, to fulfil his campaign promise, has signed into law a $1.9 billion package that injects money in various sectors in his rescue plan, including boosting consumer spending with $1,400 stimulus cheques for millions of households.
He is also floating other spending plans, including $3 trillion recovery for infrastructure that will rehabilitate or build roads, schools, fund businesses, health care, and other sectors with multiplier effects.
The OEC forecast 5.1 per cent growth for the United Kingdom in 2021 followed by 4.7 per cent next year, even though the UK and other and countries face the risk of lasting costs from the pandemic.
The significantly brighter outlook reflects the deployment of effective vaccines, the BBC explains.
There is a particularly substantial upgrade for the US national forecast for this year, according to the OCED, saying there are likely to be welcome spill-overs in major US trading partners.
The global economy is now likely to reach pre-pandemic levels of activity by the middle of this year, the report suggests.
But that does not mean the pandemic related damage will have been reversed by then. Without the health crisis the economy would have been expected to grow throughout the last year.
Risk of coronavirus
The report looks at what it now expects for the final quarter of 2022 compared with the projections it made before the pandemic, in November 2019.
Of the G20 major economies only two, the US and Turkey, are predicted to beat that previous projection.
The shortfall is very substantial for some emerging economies, notably India, Indonesia and South Africa.
Among the developed economies, the largest shortfall on this measure is for Spain, followed by the UK, at more than 4 per cent.
The BBC adds that there are, inevitably, some risks associated with the improved outlook the prior describes.
OECD Chief Economist Laurence Boone said the pace of vaccinations around the world was not fast enough to consolidate the recovery.
The report also mentions the possibility of new virus variants as a risk to economic prospects, and sets out some striking information about how the pattern of economic activity has changed during pandemic.
In a selection of developed economies, online sales in the last quarter of 2020 had increased from a year earlier by more than 20 per cent in all, and by more than 60per cent in Britain and Canada.
It was a very different story for total retail sales, so this was a sign of changing patterns of consumer behaviour.
Total sales did increase in a few countries, but only by single figure percentages and in two (Spain and Italy) there was a fall.
Job opportunities posted online also showed the impact of the health crisis. There were increases for healthcare and production (industrial jobs), but large declines in some service industries notably catering.
However, all sectors showed some rebound from the even deeper declines that occurred last April.
Areas of concern
The OECD, which is based in Paris, said “economic prospects have improved markedly in recent months,” pointing to the deployment of coronavirus vaccines and additional stimulus announcements.
It predicts the US economy to expand by 6.5 per cent this year, over three percentage points better than the December forecast. The agency pointed to the effects of “strong fiscal support” from Biden’s $1.9 trillion stimulus package.
CNN notes, however, that the OECD also emphasised that extreme uncertainty remains, and that plenty of factors could jeopardise the recovery.
One example: Investors have become increasingly concerned that a rush of activity could trigger a spike in prices later this year, forcing central banks to raise interest rates or taper bond purchases sooner than expected.
According to the OECD, a rebound in demand, especially from China, is pushing up food and metals prices, while oil prices have staged a strong comeback. But the group said it will be essential for policymakers to keep the stimulus coming, even if inflation overshoots some targets.
The possibility of a sharp rise in prices is far from the only fear, CNN adds.
Vaccine campaigns are moving at different speeds around the world, the OECD notes, and coronavirus variants that resist vaccines could still emerge.
“Slow progress in vaccine rollout and the emergence of new virus mutations resistant to existing vaccines would result in a weaker recovery, larger job losses and more business failures,” it said in its report.
The OECD also said it is essential that governments maintain their support for the economy even as the situation starts to brighten. European Central Bank President Christine Lagarde has issued a similar warning, cautioning that countries should not “brutally” pull stimulus.
“A premature tightening of fiscal policy must be avoided,” the group said.
Another worry is high levels of debt. The OECD focused on corporate debt loads, in particular, with debt servicing burdens at or above their level during the 2008 financial crisis even though interest rates are at historic lows.
“Although some firms have used borrowing to build up sizable cash buffers since the onset of the pandemic, high leverage could moderate new investment,” it said. If the recovery is slower than expected, or government support programs end too soon, this could “trigger additional debt delinquencies or defaults.”
Right now, these are just hypotheticals. But so are expectations of booming growth, which are due to play out in the coming months. The OECD report is a reminder that while the outlook is brightening, it’s also tentative, according to CNN.
Thriving stocks, hammered Big Tech
Tech companies are clearly the big losers in markets right now, says the broadcaster.
Apple is nearing bear market territory, while the tech-heavy Nasdaq Composite entered a correction on March 8, having dropped 10.5 per cent below the record it notched in mid-February.
But plenty of firms are benefiting from the stock market rotation, as investors give companies they’d dumped earlier in the pandemic a second look.
See here: Disney (DIS) shares jumped more than 6 per cent March 8, while Visa (V) and American Express (AXP) both rose 2 per cent.
These firms all stand to benefit if a strong economic rebound materialises later this year, sparking a surge in travel and consumer spending. They’re getting more attention with Biden’s $1.9 trillion stimulus.
“The … passage of another huge fiscal support package in the US adds to our conviction that the reflation and rotation trends currently underway in bond and equity markets both have further to run,” Oliver Jones, senior markets economist at Capital Economics, said in a note to clients.
