MNI POLICY: More Fiscal Aid Needed as World GDP -4.5%: OECD

Global policy makers must press ahead with expansive fiscal aid and low interest rates in 2021 to pull out of this year's unprecedented 4.5% GDP decline, even with early success re-opening economies, the OECD said Wednesday.

The Paris-based group pared back the June estimate for a 2020 contraction of at least 6% even without a second wave of Covid-19, while paring the 2021 rebound 0.2pp to 5%. Business investment and consumption remain fragile, meaning governments must pick up the slack.

"Output picked up swiftly following the easing of confinement measures and the initial re-opening of businesses, but the pace of the global recovery has lost some momentum over the summer months," the Interim Economic Outlook report said. "The drop in global output in 2020 is smaller than expected, though still unprecedented in recent history, but this masks considerable differences across countries, with upward revisions in China, the United States and Europe, but weaker-than-expected outcomes in India, Mexico and South Africa."

The weaker U.S. dollar has also boosted the world's largest economy and created some demand for products from emerging markets, while weighing on activity in other advanced economies, the OECD said. U.S. GDP will still fall 3.8% this year, while the euro zone contracts 7.9%. China is the only G20 economy seen expanding this year with a 1.8% gain, because it faced the virus earlier and contained it quickly with the use of strong policy support, the OECD said.

"Fiscal policy support needs to be pursued in 2021 and recent announcements in many countries of additional fiscal measures are welcome; the aim must be to avoid premature budgetary tightening at a time when economies are still fragile," the OECD said. "Many central banks have appropriately announced further policy easing in the past three months and changes in policy frameworks are being rightly introduced to convince investors that policy rates will be kept low for a long time."