The west’s leading economic thinktank has warned governments and central banks against an over-hasty withdrawal of support for growth amid concerns that recovery from the pandemic-induced recession is incomplete.
The Paris-based Organisation for Economic Co-operation and Development (OECD) said a continuation of the stimulus policies of the past 18 months was justified because the recent pickup in inflation was likely to prove temporary.
Central banks – including the US Federal Reserve and the Bank of England – have started to voice concerns about rising cost of living pressures but the OECD said policy support was still needed as long as the outlook was uncertain and employment had not yet recovered fully to its pre-crisis levels.
The thinktank said central banks should combine loose monetary policy – keeping interest rates low and continuing with asset purchase programmes – with clear guidance about how high they would be prepared to see inflation go before taking action.
The OECD secretary-general, Mathias Cormann, said: “The world is experiencing a strong recovery thanks to decisive action taken by governments at the height of the crisis. But as we have seen with vaccine distribution, progress is uneven. Ensuring the recovery is sustained and widespread requires action on a number of fronts – from effective vaccination programmes across all countries to concerted public investment strategies to build for the future.”
The thinktank said the world economy was on course to grow slightly less fast than it expected in its half-yearly outlook three months ago. Its interim update pencilled in expansion of 5.7% in 2021, down 0.1 points on its previous estimate.
Five of the members of the G7 – the leading industrial nations – are now forecast to grow less rapidly than in May. The UK’s growth forecast has been revised down from 7.2% to 6.7%, while the US and Germany have seen downgrades of 0.9 and 0.4 points to 6% and 2.9%, respectively. France’s growth estimate has been increased by 0.5 points to 6.3% while Italy is now on course for 5.9% growth this year, up 1.4 points on three months ago.
Fuelled by recovering demand for goods and supply chain strains, inflation is expected to peak towards the end of the year at 4.5% on average in the Group of 20 leading economies, before easing to 3.5% by the end of 2022.
The OECD said a rapid increase in demand as economies reopen had pushed up prices in key commodities such as oil and metals as well as food, which had a stronger effect on inflation in emerging markets. The disruption to supply chains caused by the pandemic has added to cost pressures, while shipping costs had increased sharply.
Laurence Boone, the OECD chief economist, said: “Policies have been efficient in buffering the shock and ensuring a strong recovery; planning for more efficient public finances, shifted towards investment in physical and human capital is necessary and will help monetary policy to normalise smoothly once the recovery is firmly established.”
