The Organisation for Economic Co-operation and Development (OECD) said the global economic slump will not be as sharp as previously feared this year. The Paris-based institution said that the world economy will shrink 4.5 per cent this year, less than the 6 per cent forecast in June, upgrading its outlook in response to rebounds in activity since lockdowns ended.

There were big revisions for the United States and the euro area, as well as China, which is now forecast to grow modestly, the only Group of 20 country with such a prospect. The better view reflects the strong economic pickup in recent months.

The US unemployment rate fell more than forecast last month, while China this week reported positive retail and industrial production data. While that initially strong pickup means the 2020 number looks a little less grim, the pace of the recovery is now fading, and output in many countries will still be below its pre-crisis level at the end of 2021. There is also a risk of long-lasting damage to economies, as well as bankruptcies and job losses.

Amid such dangers, the OECD said governments and central banks must continue to provide support into 2021, after huge efforts this year that have bloated balance sheets and stretched fiscal budgets. But it added that assistance programmes must evolve as growth picks up, allowing money to be better targeted at protecting businesses and jobs in sectors with a viable future. That echoes comments from the Bank for International Settlements on Monday, which said the challenge is to support companies without creating “zombie” firms that damage economies in the longer term.

While the OECD upgraded the global outlook, it also made huge downward revisions to a number of emerging markets. India’s economy will shrink 10.2 per cent this year, almost three times the previous forecast, while Argentina, Mexico and South Africa will also suffer more than predicted in June.

The OECD said there is still huge uncertainty about the outlook, and its latest projections assume continued sporadic virus outbreaks along with targeted local interventions. The new forecasts compare with its “single shock” scenario in June, which was based on no second wave of Covid-19.

BLOOMBERG

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