The global economy is set for a “significant but uneven” recovery this year due to swift policy actions and rapid Covid-19 vaccine distribution in some countries, though headwinds still persist, the Organisation for Economic Cooperation and Development (OECD) said.

The world economy is projected to rebound 5.75 per cent this year and nearly 4.5 per cent in 2022, following a 3.5 per cent contraction in 2020, the 37-member country OECD said on Monday in its economic outlook. That marks a slight increase from its March forecast when the Paris-based policy forum estimated an expansion of 5.6 per cent in 2021.

In April, the International Monetary Fund raised its global economic outlook forecast to 6 per cent this year, compared with a previous forecast of 5.5 per cent.

A fast-growing manufacturing sector, strong rebound in trade as borders reopen, a gradual resumption of travel, a surge in consumption and higher number of hours worked are encouraging signs and should “limit the scars” from the crisis, the OECD said.

“The world economy is currently navigating towards the recovery, with lots of frictions,” Laurence Boone, OECD chief economist, said. “The risk that sufficient post-pandemic growth is not achieved or widely shared is elevated.”

While the global economy has returned to pre-pandemic activity levels, it remains below its pre-pandemic growth path. In many OECD countries living standards by the end of 2022 will not return to the level expected before the crisis, the report showed.

Looming over the brighter economic outlook are risks related to the changing nature of the coronavirus, household savings and conditions in emerging market and developing economies, the OECD warned.

Emerging and low-income countries are not receiving enough vaccines, exposing them to a “fundamental threat” because they have a reduced capacity to provide support than more advanced economies, the organisation said.

A new and much-debated risk is the possibility of higher inflation as central banks and governments pump trillions of dollars to support economies. Commodity prices have been rising fast while bottlenecks in some sectors and disruptions to trade are creating price tensions, according to the OECD.

In addition, “substantial uncertainty” remains around new, more contagious and more fatal virus variants that are increasingly resistant to existing vaccines, unless effective vaccines are deployed quickly and widely. This could mean reinstating strict containment measures, with the ensuing economic costs related to lower confidence and spending, the report said.

Amid this uncertain environment, governments need to continue adopting flexible and sustainable policies.

The OECD urged policymakers to prioritise distributing vaccines quickly to save lives, preserve incomes and limit the negative impact of containment measures.

“Stronger international efforts are needed to provide low-income countries with the resources to vaccinate their populations for their own and global benefits,” the report said.

Sharing knowledge, medical and financial resources, and avoiding harmful bans to trade, especially in healthcare products, are all essential to address the pandemic-induced challenges.

Governments in advanced economies must maintain the current accommodative monetary policy, and temporary overshooting of headline inflation should be allowed provided underlying price pressures are contained, the OECD said.

Globally, governments provided $16 trillion in fiscal stimulus last year, backed by $9tn in monetary support from central banks.

Continued income support for households and companies is warranted until vaccination allows a significant easing of restraints on high-contact activities, the OECD added.

The strong fiscal policy stimulus being implemented this year is appropriate but some moderation in support appears likely in 2022, according to the organisation.

Structural reforms aimed at strengthening economic resilience and mitigating climate change are needed to help reallocate workers and resources towards sustainable sectors, it said.