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. Such a shift, if it takes hold, could lead to a decline in labor productivity growth over time, the organization noted.
Countries are grappling with large holes in their finances as governments borrowed heavily during the pandemic from central banks and spent enormous sums to support businesses and individuals from the economic ravages of virus-induced 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.
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.