The global economy’s setback from the pandemic is expected to largely stabilize by the end of next year, the Organization for Economic Cooperation and Development said Tuesday, with most major economies returning to a prepandemic growth path by 2025 at the latest.
But the rebound could be delayed if the pandemic drives a retreat from globalization, the organization said, as governments and business leaders begin to question whether global supply chains have been stretched too far. And governments must begin taking action to reduce the towering amounts of debt left behind by stimulus measures.
“Long-run scenarios assume no lingering growth effects” on the global economy beyond 2022, the organization said in a new report on the fiscal outlook through 2060. But that could turn out “to be an optimistic assumption if, for instance, the pandemic ushers in a de-globalisation trend.”
Businesses of all sizes have been facing delays, product shortages and rising costs linked to disruptions in the global supply chain. The pandemic has starkly revealed the dependence that Western nations in particular have on foreign supplies as diverse as medical equipment and semiconductors.
Policymakers in the United States, Europe and other nations are increasingly examining whether production should be brought back home to address national security and public health concerns.
But such a shift, should it takes hold, could wind up hurting economies more than it helps.
“We’re seeing warning signs about globalized production from Covid, the supply chain crisis and also Brexit, which is adding more barriers and more production at home,” said Bert Colijn, a senior economist at ING Bank.
“But it’s a very efficient process that’s been set up, and taking production back to your own country is something that would likely result in a loss of productivity and competitiveness,” he said.
An earlier study by the organization found that re-localizing a production process that is spread across different countries, known as a global value chain, would make those countries less exposed to foreign shocks, but also less efficient and less able to cushion shocks through trade.
Reshoring production could jeopardize productivity and raise costs, said the organization, which concluded that the case for making economies less interconnected was “weak.”
Countries can ill afford to trip up the budding economic rebound from the pandemic as they grapple with repairing large holes in their finances brought on by lockdowns and support programs. Governments borrowed heavily from central banks and spent enormous sums to support businesses and individuals from the economic ravages of lockdowns.
The national debt of major countries will balloon next year by as much as 25 percentage points of their gross domestic product because of pandemic-related effects, the report said. Most central banks have lent the money at ultra-low rates, so the interest payments that governments owe are manageable, assuming they are continuously rolled over, the O.E.C.D. report said.
Even so, nearly all of the 35 countries that are members of the organization, including United States and European nations, will need to rein in spending and start collecting more revenue for national coffers within the next couple of years if they are to stabilize the share of public debt over the long term, the report said.
To get on a more sustainable financial footing, countries need to get more ambitious about lowering pension costs, in part by raising national retirement ages, and introducing labor reforms intended to strengthen employment. Failing to take action would deal a serious blow to the economy’s growth potential in the coming decades, the O.E.C.D. said.
The organization said it was not recommending that governments raise taxes to make up for all the shortfall. But the analysis in the report showed that all O.E.C.D. governments would need to raise taxes to prevent gross government debt ratios from rising over time.
And despite the financial burden brought on by emergency government spending during the pandemic, the direct fiscal impact pales in comparison to looming long-term expenses like funding pensions and health services as societies age, the organization said.
Unless governments start reducing their debt, “population aging and the rising relative price of public services will keep adding fiscal pressure onto O.E.C.D. countries in the decades ahead,” the report concluded.
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