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Delta Variant Set to Slow but Not Derail Global Economic Recovery

BY PAUL HANNON | UPDATED SEP 21, 2021 06:20 AM EDT

OECD cuts growth forecast for this year but raises projections for 2022

The fast-spreading Delta variant of Covid-19 has slowed the pace of the global economic recovery but won’t derail it, according to new forecasts released by the Organization for Economic Cooperation and Development.

In its latest quarterly report on the economic outlook published on Tuesday, the Paris-based research body lowered its growth forecasts for the global and U.S. economies in 2021, the first downgrade since December of last year, when new infections were surging.

But it also raised its forecasts for next year, indicating that some output has been delayed by, rather than lost to, the Delta surge. It also raised its forecasts for inflation this year, but continues to expect that the pace of price rises will ease in 2022 as vaccination programs advance in Asia and other parts of the world.

“We still think it’s transitory," said Laurence Boone, the OECD’s chief economist. “The disruption of supply chains is mostly due to the vaccine situation."

The OECD lowered its growth forecast for the U.S. economy in 2021 to 6% from the 6.9% projected in May, and trimmed its global growth forecast to 5.7% from 5.8%. It raised its growth forecast for the eurozone, but left its projection for China unchanged despite worries about the country’s property market as China Evergrande Group appears on the brink of collapse. The company’s debt burden is the biggest for any publicly traded real-estate management or development company in the world.

“We are concerned about what’s happening on the financial side," Ms. Boone said.

The OECD forecasts come amid mounting signs of a cooling of growth after the period of rapid expansion that accompanied the reopening of parts of the services sector in a number of large, rich countries that were first to vaccinate large shares of their populations.

The Delta variant appears to have taken some of the momentum out of that process of reopening, while its rapid spread in Asian countries that hadn’t been able to vaccinate their populations has prompted new restrictions on manufacturing and logistics that have worsened shortages of parts and finished consumer goods destined for Western markets.

“That’s been central to the problems we face," said Stephen Loftus, chief commercial officer at Brompton Bicycle Ltd., a London-based maker of folding bicycles.

The company has seen a surge in demand as workers in its home city and elsewhere seek safe alternatives to what were perceived as risky public transport systems. It made a third more bicycles in the period from April to August than it did over the same stretch of 2020, with sales to the U.S. up by half over the past 12 months.

But Mr. Loftus believes it could have made and sold many more of its bicycles if it had been able to get hold of the parts it needed, while factory shutdowns in Vietnam designed to slow the spread of the Delta variant hindered its ability to make and sell a range of bags that fit its bicycles.

However, Mr. Loftus doesn’t believe that unsatisfied demand has gone away, and that means Brompton will have at least another year of rising output, likely boosted by fresh buyers as more workers return to their workplaces in the world’s large cities.

“We’ve got a lot to pick up from the demand that hasn’t been fulfilled," he said. “That’s reflected in the fact that we have retailers that have got no stock in store."

With demand for many consumer goods still strong, and many services industries yet to return to their pre-pandemic levels of output, the global economic recovery is set to continue into 2022, aided by vaccination programs. According to the OECD, the U.S. economy will grow 3.9% next year, a faster expansion than the 3.6% increase in gross domestic product that it forecast in May. Globally, it sees economic output rising 4.5%, slightly faster than its previous projection.

Bottlenecks of the kind that have held Brompton back have contributed to a recent pickup in the pace of price rises across the world, and the OECD raised its inflation forecasts for most of the Group of 20 largest economies. Responding to its own increase in costs, Brompton said it had raised bicycle prices by around 5%.

But the OECD doesn’t expect to see further pickups in inflation during 2022, and sees the pace of price rises easing in the U.S. and the eurozone, although it does expect an acceleration in China. It expects expanding vaccine programs in poorer countries to help ease bottlenecks. While a rich country like Spain has vaccinated just short of 90% of its adult population, Indonesia has inoculated roughly a third.

Even so, the OECD said central banks in rich countries should set out their path away from policies designed to provide emergency support to their economies. But its main concern lies with a number of large developing economies, such as Brazil, which have seen inflation rise rapidly, prompting their central banks to raise their interest rates quickly. With debt levels high, rising interest payments for households and businesses could delay the recovery.

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