There was an unexpectedly strong global economic recovery this year. A year ago, the OECD forecast global economic growth of 4.2 percent in 2021, after a decline of 4.2 percent in 2020. It now knows that the contraction in 2020 was only 3.4 percent. Yet, even after a smaller-than-expected recession in 2020, this year’s growth is forecast at 5.6 percent. The strong recovery is welcome. But it is also unequal in many ways.
The most remarkable achievement relative to expectations a year ago was by the high-income countries. It is now predicted that the US economy will grow by 5.6 percent and the eurozone by 5.2 percent in 2021. A year ago, US growth is forecast at only 3.2 percent this year and the eurozone’s at 3.6 percent. In everything, says the latest economic outlook, “output in most OECD countries is now close to or above pre-pandemic levels”. Nevertheless, “the power of recovery has not yet allowed a full healing of the world economy from the effects of the pandemic.”
The striking feature of this recovery was his inequality on multiple dimensions – relative performance of richer and poorer countries, distribution of vaccination, scope and characteristics of policy support, behavior of labor markets, patterns of sectoral demand, extent of disruptions in supply chains and shortages of essential resources.
Despite the recovery, the OECD states that global output in mid-2021 was still 3.5 percent below the pre-pandemic forecast. Crucially, the lost output is unevenly distributed, with relatively larger losses in middle-income emerging economies than in high-income countries and the largest losses in low-income countries, with dire effects on the world’s poorest.
The significantly greater scope for fiscal and monetary support in rich countries and the difference in vaccinations explain these differences. At the beginning of December, the number of doses administered per hundred people ranged from 183 in China and 176 in the UK to 140 in the USA, 93 in India, 44 in South Africa and only 5 in Nigeria. This gap must be closed if the world economy is to reopen and Covid wants to be controlled.
Not only could high-income countries spend more freely, they also did so in a variety of ways. In countries that spend heavily on job retention programs, like Germany and France, labor force participation is about where it was before the pandemic. In countries where support is concentrated on the unemployed, especially in the US, unemployment is low and vacancies are high, while participation has declined as many workers have apparently left the workforce.
The pandemic also had significant sectoral impacts, with a relatively strong demand for manufacturing and a relatively weak demand for personal services. This had a strong differential effect on the demand for workers. It has also created bottlenecks in supply chains, particularly in the manufacture of motor vehicles. Guest shortages also arose, which led to large jumps in electricity prices.
The combination of shortages with strong pressure on labor markets also generates unexpectedly high inflation. Jay Powell, who was recently re-appointed chairman of the US Federal Reserve, withdrew the word “perishable” from his vocabulary. Monetary policy is likely to intensify faster than expected just a month or so ago.
Despite the good news, 2021 will therefore pose major challenges, not least to combat inflation, while sustaining demand. The advent of the Omicron variant also reminds us that Covid remains a threat and worldwide delivery of vaccines an obligation and a necessity. Much has been achieved in 2021. But much remains to be done in 2022.
This main article has been updated to remove an erroneous repeated reference to China in vaccination data.