World — Global economic recovery enters a slower phase

COVID-19 triggered a sudden and unprecedented collapse in global output in the first half of 2020. Policymakers reacted forcefully and rapidly to cushion the shock to incomes and jobs, restore confidence and ease financial conditions. Economic activity initially rebounded once mobility restrictions eased. But high-frequency indicators and business surveys suggest the pace of the global recovery has lost momentum. While China is operating at above 90% of pre-pandemic levels, economic activity in advanced and emerging economies has levelled off at around 75%.

The outlook remains highly uncertain. The OECD forecasts a gradual recovery to continue through the next eighteen months—assuming continued sporadic local outbreaks are addressed by targeted interventions rather than large-scale lockdowns and a vaccine becomes widely available from late 2021. In this scenario, the recovery will be muted as the boost from reopening fades, weak labour markets constrain consumption, and uncertainty weighs on firms’ investment spending. With the virus outbreak not yet contained, localised lockdowns, border closures and social distancing behaviour will also drag on activity. Emerging markets face the extra challenges of limited social safety nets and healthcare capacity and less scope for aggressive policy stimulus. The level of output at the end of 2021 will remain below that at the end of 2019 in most economies, highlighting the likelihood of long-lasting economic scarring.

On the upside, if the COVID-19 threat fades more quickly than expected, improved confidence could boost global activity by around 2ppts in 2021. On the downside, a stronger resurgence of COVID-19 or more stringent containment measures could see global growth 2-3ppts lower than forecast next year (Chart). To this end, record daily confirmed cases in the UK and European Union this month are of concern.