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Building confidence crucial amid an uncertain economic recovery

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With the COVID-19 pandemic continuing to threaten jobs, businesses and the health and well-being of millions amid exceptional uncertainty, building confidence will be crucial to ensure that economies recover and adapt, says the OECD’s Interim Economic Outlook.

After an unprecedented collapse in the first half of the year, economic output recovered swiftly following the easing of containment measures and the initial re-opening of businesses, but the pace of recovery has lost some momentum more recently. New restrictions being imposed in some countries to tackle the resurgence of the virus are likely to have slowed growth, the report says.

Uncertainty remains high and the strength of the recovery varies markedly between countries and between business sectors. Prospects for an inclusive, resilient and sustainable economic growth will depend on a range of factors including the likelihood of new outbreaks of the virus, how well individuals observe health measures and restrictions, consumer and business confidence, and the extent to which government support to maintain jobs and help businesses succeeds in boosting demand.

The Interim Economic Outlook projects global GDP to fall by 4½ per cent this year, before growing by 5% in 2021. The forecasts are less negative than those in OECD’s June Economic Outlook, due primarily to better than expected outcomes for China and the United States in the first half of this year and a response by governments on a massive scale. However, output in many countries at the end of 2021 will still be below the levels at the end of 2019, and well below what was projected prior to the pandemic.

If the threat from COVID-19 fades more quickly than expected, improved business and consumer confidence could boost global activity sharply in 2021. But a stronger resurgence of the virus, or more stringent lockdowns could cut 2-3 percentage points from global growth in 2021, with even higher unemployment and a prolonged period of weak investment.

Presenting the Interim Economic Outlook, covering G20 economies, OECD Chief Economist Laurence Boone said: “The world is facing an acute health crisis and the most dramatic economic slowdown since the Second World War. The end is not yet in sight but there is still much policymakers can do to help build confidence.”

She added: “It is important that governments avoid the mistake of tightening fiscal policy too quickly, as happened after the last financial crisis. Without continued government support, bankruptcies and unemployment could rise faster than warranted and take a toll on people’s livelihoods for years to come. Policymakers have the opportunity of a lifetime to implement truly sustainable recovery plans that reboot the economy and generate investment in the digital upgrades much needed by small and medium-sized companies, as well as in green infrastructure, transport and housing to build back a better and greener economy.”

The report warns that many businesses in the service sectors most affected by shutdowns, such as transport, entertainment and leisure, could become insolvent if demand does not recover, triggering large-scale job losses. Rising unemployment is also likely to worsen the risk of poverty and deprivation for millions of informal workers, particularly in emerging-market economies.

The rapid reaction of policymakers in many countries to buffer the initial blow to incomes and jobs prevented an even larger drop in output. The Interim Outlook says it is essential for governments not to repeat mistakes of past recessions but to continue to provide fiscal, financial and other policy support at the current stage of the recovery and for 2021. Such measures should be flexible enough to adapt to changing conditions and become more targeted.

Continued state support needs to be increasingly conditioned on broader environmental, economic and social objectives. Better targeting of support to where it is needed most will improve prospects, particularly for the unemployed and the low skilled – groups who too often miss out on training – and for youths. The report acknowledges that a balance needs to be struck between providing immediate support to strengthen the recovery while encouraging workers and businesses in hard-hit sectors to move into more promising activities.

Support also needs to be focussed on viable businesses, moving away from debt into equity, to help them to invest in digitalisation, and in the products and services our society will need in the decades ahead. Far stronger commitment needs to be devoted to address climate change in recovery plans, in particular conditioning support on greater investment in green energy, infrastructure, transport and housing.

At the same time, and with the virus continuing to spread, investing in health professionals and systems must remain a priority. The OECD says global co-operation and co-ordination are essential, as greater funding and multilateral efforts will be needed to ensure that affordable vaccines and treatments will be deployed rapidly in all countries when available.

The release of the Interim Economic Outlook follows an OECD Ministerial Roundtable at which Secretary-General Angel Gurría called for countries to go further in greening the stimulus packages they have announced to tackle the impact of the COVID-19 crisis in order to drive sustainable, inclusive, resilient economic growth and improve well-being.

“Climate change and biodiversity loss are the next crises around the corner and we are running out of time to tackle them,” he said. “Green recovery measures are a win-win option as they can improve environmental outcomes while boosting economic activity and enhancing well-being for all.”

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Appliance standards and labelling is highly effective at reducing energy use

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Policies that introduce minimum efficiency performance standards and energy-consumption labelling on appliances and equipment have led to reduced power consumption, lower carbon emissions, and cost savings for consumers, according to analysis published today by the IEA and the 4E Technology Collaboration Programme (4E TCP).

The report’s findings are drawn from nearly 400 evaluation studies covering 100 countries, including those with the longest running and strongest appliance policies, such as China, European Union, Japan and the United States.

“The findings from the study are important as they provide evidence that standards and labelling are highly effective policy instruments that bring benefits to consumers as well as lower emissions and lower energy demand,” said Brian Motherway, the Head of Energy Efficiency at the IEA.

The study shows the policies have had significant positive impacts:

  • In countries with long-running policies, appliances are now typically consuming 30% less energy than they would have done otherwise.
  • In the nine countries/regions for which data were available, such programmes reduced annual electricity consumption by a total of around 1 580 terawatt-hours in 2018 – similar to the total electricity generation of wind and solar energy in those countries.
  • The programmes that have been operating the longest, such as those in the United States and the European Union, are estimated to deliver annual reductions of around 15% of their current total national electricity consumption. This percentage increases each year as more of the older, less-efficient stock is replaced with equipment that meets new higher efficiency standards.
  • These energy savings represent a significant financial boon for businesses and householders. In the United States alone, utility customers are now economising USD 60 billion each year, or USD 320 per customer.
  • Also, the United States, European Union and China together are avoiding annual CO2 emissions of more than 700 million tonnes, equivalent to the total energy-related emissions of Germany.
  • Well-designed policies encourage product innovation and lead to economies of scale, which reduces the cost of appliances even without accounting for the efficiency gains. For example, in Australia the sticker price of appliances has typically fallen 40% over the last 20 years, while average energy consumption has fallen by a third.

“The message is simple: expanding standards and energy efficiency labelling programmes makes the energy transition challenge easier, more affordable and become a reality,” said Jamie Hulan, the Chair of the 4E TCP.

The IEA will continue to collaborate with 4E TCP to enhance and promote the use of such policies. 4E TCP is an international platform for fourteen countries and the European Union to exchange technical and policy information focused on increasing the production and trade in efficient end-use equipment.

Ahead of this November’s COP26 Climate Change Conference, the IEA is working with the UK Government via the Super-Efficient Equipment and Appliance Deployment (SEAD) initiative to coordinate and improve international action on product energy efficiency. The United Kingdom is leading the COP26 Product Efficiency Call to Action, which aims to double the efficiency of key global products by 2030, initially focusing on four key energy-consuming products: air conditioners, refrigerators, lighting and industrial motors systems. The IEA is supporting the implementation of this work and helping expand the number of countries ready to make this commitment.

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Global economy projected to show fastest growth in 50 years

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The global economy is expected to bounce back this year with growth of 5.3 per cent, the fastest in nearly five decades, according to the UN Conference on Trade and Development (UNCTAD).

In its new report released on Wednesday, the agency said that the rebound was highly uneven along regional, sectoral and income lines, however.  

During 2022, UNCTAD expects global growth to slow to 3.6 per cent, leaving world income levels trailing some 3.7 per cent below the pre-pandemic trend line. 

The report also warns that growth deceleration could be bigger than expected, if policymakers lose their nerve or answer what it regards as misguided calls for a return to deregulation and austerity. 

Differences in growth 

The report says that, while the response saw an end to public spending constraints in many developed countries, international rules and practices have locked developing countries into pre-pandemic responses, and a semi-permanent state of economic stress. 

Many countries in the South have been hit much harder than during the global financial crisis. With a heavy debt burden, they also have less room for maneuvering their way out through public spending. 

Lack of monetary autonomy and access to vaccines are also holding many developing economies back, widening the gulf with advanced economies and threatening to usher in another “lost decade”. 

“These widening gaps, both domestic and international, are a reminder that underlying conditions, if left in place, will make resilience and growth luxuries enjoyed by fewer and fewer privileged people,” said Rebeca Grynspan, the secretary-general of UNCTAD. 

“Without bolder policies that reflect reinvigorated multilateralism, the post-pandemic recovery will lack equity, and fail to meet the challenges of our time.” 

Lessons of the pandemic 

UNCTAD includes several proposals in the report that are drawn from the lessons of the pandemic. 

They include concerted debt relief and even cancellation in some cases, a reassessment of fiscal policy, greater policy coordination and strong support for developing countries in vaccine deployment. 

Even without significant setbacks, global output will only resume its 2016-19 trend by 2030. But even before COVID-19, the income growth trend was unsatisfactory, says UNCTAD. Average annual global growth in the decade after the global financial crisis was the slowest since 1945. 

Despite a decade of massive monetary injections from leading central banks, since the 2008-9 crash, inflation targets have been missed. Even with the current strong recovery in advanced economies, there is no sign of a sustained rise in prices. 

After decades of a declining wage share, real wages in advanced countries need to rise well above productivity for a long time before a better balance between wages and profits is achieved again, according to the trade and development body’s analysis. 

Food prices and global trade 

Despite current trends on inflation, UNCTAD believes the rise in food prices could pose a serious threat to vulnerable populations in the South, already financially weakened by the health crisis. 

Globally, international trade in goods and services has recovered, after a drop of 5.6 per cent in 2020. The downturn proved less severe than had been anticipated, as trade flows in the latter part of 2020 rebounded almost as strongly as they had fallen earlier. 

The report’s modelling projections point to real growth of global trade in goods and services of 9.5 per cent in 2021. Still, the consequences of the crisis will continue to weigh on the trade performance in the years ahead. 

For director of UNCTAD’s globalization and development strategies division, Richard Kozul-Wright, “the pandemic has created an opportunity to rethink the core principles of international economic governance, a chance that was missed after the global financial crisis.” 

“In less than a year, wide-ranging US policy initiatives in the United States have begun to effect concrete change in the case of infrastructure spending and expanded social protection, financed through more progressive taxation. The next logical step is to take this approach to the multilateral level.” 

The report highlights a “possibility of a renewal of multilateralism”, pointing to the United States support of a new special drawing rights (SDR) allocation, global minimum corporate taxation, and a waiver of vaccine-related intellectual property rights.  

UNCTAD warns, though, that these proposals “will need much stronger backing from other advanced economies and the inclusion of developing country voices if the world is to tackle the excesses of hyperglobalization and the deepening environmental crisis in a timely manner.” 

For the UN agency, the biggest risk for the global economy is that “a rebound in the North will divert attention from long-needed reforms without which developing countries will remain in a weak and vulnerable position.”

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Italy: Pro-growth reforms and government support key to a greener and jobs-rich recovery

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The post-COVID recovery offers an exceptional opportunity for Italy to tackle long-standing obstacles to job creation and the raising of living standards, according to a new OECD report.

The OECD’s latest Economic Survey of Italy says government support for Italian households and businesses hit hard by the COVID-19 pandemic should continue until the recovery is firmly underway, but should become increasingly targeted as the economy continues to strengthen. It says that generous fiscal support has been effective in mitigating job losses and preserving productive capacity. This will help boost the short-term recovery as vaccination rates accelerate and restrictions ease. Higher public spending, including from Next Generation EU funds, will support higher investment alongside improved confidence and demand.

The National Recovery and Resilience Plan offers a unique opportunity to create a greener, more digitised and productive economy, the report adds. The government, it says, has an ambitious agenda rightly prioritising reforms to competition, to boost the efficiency of civil justice processes and to reform the public sector in order to tackle uncertainty, delays and costs that currently hamper investment. Green infrastructure and broadband investments can improve the competitiveness of Italian firms.

The report suggests that the chances of implementing this reform plan successfully are greater than on previous occasions. Clear implementation milestones and targets linked to the disbursement of Next Generation EU funds have been publicised, while recently passed laws to simplify green investments and support decision-making  will help facilitate successful implementation of the plan.

The OECD projects Italy’s economic growth to be 5.9% this year and 4.1% in 2022, following an 8.9% fall in GDP in 2020. A stronger-than-expected second quarter explains the upward revision from the 4.5% expansion forecast for 2021 in the OECD’s May Economic Outlook. 

Presenting the report alongside Italy’s Economy and Finance Minister Daniele Franco today, OECD Secretary-General Mathias Cormann said: “Italy’s National Recovery and Resilience Plan is activating stronger, greener, fairer and more digitised growth that will benefit all Italians with improved opportunities to get ahead. A more effective public sector is crucial for ensuring its success. The plan must be fully implemented and complemented with reforms to support further growth, including with more investment in green infrastructure and R&D and reforms to keep driving the effective digital transformation of the Italian economy.”

The report recommends that once the pandemic subsides, public spending and tax policy must be reformed to complement the National Recovery and Resilience Plan. Currently, pension-related expenses crowd out investment in infrastructure, education and training, penalising the young, many of whom are out of work and at risk of poverty.

Labour force participation remains particularly low for women, especially those with children. Access to quality childcare and adult skills training needs to be improved across all regions, the report says.

Compared with the OECD average, taxes on labour remain too high. The report recommends implementing comprehensive tax reform to reduce the complexity of the system and to lower labour taxes. This should be financed through improved compliance – driven by greater use of technology and card payments.

Raising the effectiveness of Italy’s public sector is more urgent than ever. The report says that fully implementing the National Recovery and Resilience Plan will help fill skills gaps in the public sector, further its digitisation and reduce regulatory barriers that inhibit civil servants’ ability to deliver.

The report welcomes the set up for the Plan’s implementation and says the administration would generally become stronger and more agile by reducing the number of existing rules, regulating the services sector and green economy with a stronger focus on outcomes, in line with the government’s priorities and that support sustained growth. The report also recommends encouraging better coordination across Italy’s multiple layers of government.

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