The COVID-19 pandemic unleashed one of the worst economic downturns the world has seen since the 1930s Great Depression, with millions of job losses, destruction of small and medium-sized businesses, and the disruption of global supply chains in the first half of 2020.
The OECD's Interim Economic Outlook, released Wednesday, provides a glimmer of hope for the world economy in the second half of the year, as the downturn is not as severe as previously feared.
However, this is problematic for policy-makers who have unleashed easy-money policies during the pandemic to artificially inflate economies and boost risk assets, as policy support in the second half of the year might not be as great as what was seen earlier in the year (as is currently playing out in Washington with the prospect of a slimmed-down stimulus bill getting slimmer).
OECD's latest economic report shows the world economy will contract 4.5% in 2020 - an upward revision from June's estimate of -6%.
"The drop in global output in 2020 is smaller than expected, though still unprecedented in recent history," the report said.
Allianz's chief economic advisor Mohamed El-Erian points out in a tweet that OECD's global GDP projections from 2019 to current is a loss of about 7 trillion dollars.
The slightly more optimistic outlook reflects the global economy expanding by 5% in 2021. Nevertheless, the OECD continues to reiterate throughout the report that 'economic uncertainty' remains because of the virus pandemic.
The Paris-based agency said, "if the threat from the coronavirus fades more quickly than expected, improved confidence could boost global activity significantly in 2021." The key to supporting the global economy will be a combination of fiscal, monetary, and structural policy support to provide a more robust recovery. But again, the OECD says the global economy is still in a "fragile state."
The question readers should be asking: How did the global economy bounced from record depths in April and May? Well, this one done by central banks expanding their balance sheet to $28 trillion this year, while governments unleashed trillions of dollars in fiscal support. As shown in the global economic surprise index, economic data started beating to the upside in May as monetary and fiscal support was seen across the world. By August, much of the support is fading as economic data beating to the upside has stalled.
A significant issue is developing, something we outlined on Wednesday morning, is that a fiscal cliff in the US, the world's largest economy, is underway and risks reversing the recovery.
As for the recovery shape, OECD Secretary-General Angel Gurria told Bloomberg Television that a "V-shaped recovery is not going to happen."
"What we are saying is number one, don't take away the support, don't take away the relief, too fast," Gurria said.
While the global economic downturn is not as severe, the optimistic projection by the OECD suggests the Federal Reserve and other central banks may not be as inclined to unleash monetary cannons in the back half of the year.
Here's an in-depth view of the Fed's balance sheet in decline.
With a Fed's balance in decline, it will be much harder for markets to justify another round of multiple expansion.
World stocks already pricing this in?
With OECD raising its global economic outlook, policy-makers who are hooked on easy money policies to boost economies and financial markets will have more difficulty in promoting these policies. Does that mean asset markets are at risk of mean reversion from record highs?