The pandemic has wreaked havoc on the world economy, hitting the livelihoods of people everywhere.
But the economic recovery is underway. Economic growth continues to pick up and the economic outlook continues to improve.
Since the middle of 2020, we have consistently upgraded our growth projections, with global GDP now expected to increase by 5.7% in 2021 and 4.5% in 2022, according to our recent Interim Economic Outlook.
Extensive policy support, combined with the rapid development of effective vaccines and the accelerating digital transformation of our economies – all contributed to this more optimistic outlook.
Yet the recovery remains uneven across countries and sectors.
While we project activity in advanced economies to return to its pre-pandemic trend path, many emerging markets appear to be stuck on a permanently lower activity path than before the pandemic.
New outbreaks of the virus remain our biggest risk.
We need to continue to pursue an all-out effort to reach the entire population with vaccines as quickly as possible.
No country will be protected until every country is appropriately protected.
The inflation outlook is another area that warrants close attention.
Inflation has been steadily rising.
Although our central scenario continues to be that this is temporary, there are obvious risks.
The temporary pressures relate to higher commodity prices and higher global shipping costs, combined with a demand-supply mismatch as demand rebounded strongly with a slower recovery of production.
It is fair to say that the magnitude of these tensions is not fully captured in the traditional forecasting models.
So while our expectation is that once supply bottlenecks are resolved, inflationary pressures are likely to fade there is nevertheless a risk of more persistent inflation pressures and policymakers need to remain vigilant in the coming months.
The uneven rebound and the uncertainty surrounding inflation are threats to the global recovery.
Uneven vaccination, and the possible emergence of new variants, risk fuelling further disruption to supply chains, with continuing barriers to migration of labour resulting in more persistent price and wage pressures.
This may provoke earlier or steeper financial tightening in advanced economies, with negative spillovers back to emerging markets.
We have already seen central banks in emerging market economies starting to tighten monetary policy, appropriately, but nevertheless relatively early in this recovery cycle.
In addition, advanced economies are at best back to their pre-pandemic position with pre-existing challenges, some inflation and more debt; but many other economies remain below the trend they were on, while also having higher inflation and debt.
At this point the most pressing economic policy priority remains to vaccinate more people everywhere more quickly, to reopen borders and ease some of those tensions.
Allow me to highlight three key elements that will be essential to optimise the strength and the quality of the recovery.
First, we need to revive economic dynamism, with private sector businesses confident to invest in their future growth and success creating jobs and opportunities.
Many economies have been struggling for more than a decade before the pandemic with slow productivity growth, declining business dynamism, and persistent long-term unemployment.
There is a risk that the pandemic has exacerbated these trends, with business debts accumulated during the pandemic constraining firm investment and growth, and low-income workers bearing long-term scars from extended periods of unemployment.
We need policies which encourage future focused investment, which leads to the creation of quality jobs. Policymakers need to work with business – large and small – to identify and remove barriers to firm entry and exit, trade and private investment.
We need better skills development policies to facilitate the reskilling, upskilling and skills matching required to ensure workers can fully participate and benefit from the digital transformation of our economies.
We need to facilitate the more efficient reallocation of capital and labour to the businesses with a viable, profitable, productive future by helping firms restructure debts and entrepreneurs grow innovative ventures.
We must adapt corporate governance and capital market policies to support corporate resilience, confidence and integrity.
There is also more to do to ensure resilient global supply chains.
We need markets to remain open and reduce international trade tensions. The sustainable expansion of global trade remains the key engine of growth.
This will require multilateral cooperation and cooperation between countries, but also, critically, cooperation between the public and private sectors.
Second, we need to seize the opportunities while better managing the risks and challenges associated with the digital transformation of our economies.
The pandemic has further accelerated what was already a rapid pace of digital transformation.
For example, business surveys worldwide indicate that up to 70% of small- and medium-sized businesses have intensified their use of digital technologies due to the pandemic.i
The digital transformation brings immense benefits to economies and societies. Yet such benefits come with challenges.
Today, large gaps remain across and within countries, by region, by firm size, by gender, and between many socio-economic groups.
We must ensure appropriate and equitable access to digital infrastructure, invest in skills development and plan for the future of work, to ensure that people, firms and geographies are not left behind.
We must also effectively address competition issues and advance work on cyber security, privacy, cross border data free flow with trust, tax policy implications, as well as setting values-based standards, for example, on the use of Artificial Intelligence and ensuring it is human-centric.
The private sector has a key role to play in R&D, building infrastructure and implementing common technology standards.
Third, we need to deliver a transition to net-zero in an environmentally effective, economically responsible and publicly supported way that will not leave people behind.
Addressing climate change effectively and efficiently is a truly global challenge, which requires global leadership and co-operation.
The OECD is ramping up its work to support ambitious, effective and measurable climate action.
Our International Programme for Action on Climate (IPAC) will help countries track and assess their progress against commitments and help improve their climate action plans, through targeted policy advice and internationally harmonised indicators that are complementary to the UN Framework Convention on Climate Change (UNFCCC).
To help facilitate an ambitious, but also internationally more coherent, better co-ordinated approach to the pricing of emissions, we are also launching a new initiative to support a better understanding of both explicit and implicit carbon pricing efforts, building on our experience of the inclusive framework on international taxation.
The aim of this Inclusive Framework type approach on carbon pricing is to help ensure more ambitious action on climate change that is both globally effective and fair – while minimising competitiveness implications, carbon leakage and trade tensions.
Industry is central to the decarbonisation effort.
While policies can create the incentives for more sustainable production, firms must implement decarbonisation through their business planning, investment and supplier choices.
Many businesses have made big commitments, and it is clear that large firms need to lead by example.
But it is important small firms also implement decarbonisation strategies, given their collective impact.
For instance, in Europe SMEs contribute 60-70% of industrial pollution.
The recovery provides a window to set policies right.
The OECD plays its part by strongly and actively supporting the international rules-based system.
Last week, 136 members of the OECD/G20 Inclusive Framework on BEPS agreed a landmark deal that 1) reallocates more than 125 billion dollars of profits from around 100 of the world’s largest and most profitable multinationals to the markets where they operate, and 2) establishes for the first time a globally agreed minimum corporate tax rate of 15%.
These rules will ensure that large multinationals pay a fair share of tax and update the international tax rules for the 21st century.
Importantly, the agreement also paves the way for a standstill and rollback of digital services taxes and other similar measures, which had been the source of trade tensions.
Left unaddressed, these tensions could have cost the global economy up to an estimated 1% of global GDP.ii
We are now focused on implementation and ensuring that all 136 countries and jurisdictions meet the ambitious deadlines.
Beyond taxation, OECD work across policy areas continues to underpin and support multilateral negotiations by improving transparency across countries.
In particular, our monitoring of government support for agriculture, fossil fuels, fisheries and industrial sectors and the OECD’s inventory of digital trade help inform rulemaking at the WTO and strengthen the rules-based multilateral trading system, which has proved central to the resilience of trade and supply chains throughout the crisis.
I am convinced that we can succeed in meeting the challenges we face. But we can only do so by acting together.
Mathias Cormann, Secretary General, OECD