Outlook for top global economies is improving, OECD says

The huge shock to many of the world's biggest economies from the coronavirus pandemic may not be quite as bad as economists feared just a few months ago.

In a report published on Wednesday, the Organisation for Economic Cooperation and Development upgraded its forecast for global economic output this year, noting that while declines were still "unprecedented in recent history," the outlook has improved slightly since June.

The Paris-based agency said it now expects the world economy to shrink by 4.5% in 2020 before expanding by 5% in 2021. Previously, the OECD said it thought the global economy would contract by 6% this year and grow 5.2% next year.

But the agency, which represents the world's biggest economies, warned that headline figures mask major discrepancies. While it significantly boosted its 2020 forecasts for the United States and China, and slightly raised the outlook for Europe, the OECD lowered its expectations for developing countries such as Mexico, Argentina, India, South Africa, Indonesia and Saudi Arabia.

OECD economists said the downgrades reflected "the prolonged spread of the virus, high levels of poverty and informality, and stricter confinement measures for an extended period."

China is the only G20 country for which output is projected to rise in 2020, with its economy growing 1.8%, compared to a 3.8% contraction in the United States and a 7.9% decline among the 19 countries that use the euro. Beijing reported Tuesday that retail sales were higher in August than they had been the previous year — the first time sales have increased in 2020.

The OECD noted the earlier timing of the country's outbreak and its ability to swiftly bring it under control, as well as policies that paved the way for a rapid bounce back in activity, pointing to strong infrastructure investment in particular.

Meanwhile, South Africa's economy could shrink by 11.5% this year, according to the OECD. Mexico and India's economies are both on track for a 10.2% contraction.

That's worse than the forecasts for developed economies with the exception of Italy, which is due to shrink 10.5% after it was hit hard by the virus.

'Uncertainty remains high'

The OECD cautioned that its outlook is far from set, and much depends on the trajectory of Covid-19 infections and ongoing support from policymakers. It added that the global recovery "lost some momentum over the summer months" after an initial burst of activity.

"A recovery is now under way following the easing of strict confinement measures and the reopening of businesses, but uncertainty remains high and confidence is still fragile," the agency said in its report.

Some of its estimates are also contingent on policy assumptions that may not materialize.

The OECD assumes, for example, that the United Kingdom will reach a "basic" free trade agreement for goods with the European Union. But talks could be crushed by a controversial bill introduced by Prime Minister Boris Johnson's government, which would break the terms of a previously-negotiated divorce agreement.

The agency expects the UK economy to shrink by 10.1% this year, a slight improvement over its last estimate.

The OECD is also counting on US lawmakers to approve another stimulus package worth up to $1.5 trillion this fall, though negotiations have reached an impasse. Reaching an agreement may be more difficult as the November election approaches.

The group's predictions for the global recovery in 2021 are slightly lower than they were in June. OECD economists made clear they see a long road ahead.

"In most economies, the level of output at the end of 2021 is projected to remain below that at the end of 2019, and considerably weaker than projected prior to the pandemic, highlighting the risk of long-lasting costs from the pandemic," the report said.