Slow-Healing Scars: The Pandemic’s Legacy

Recessions wreak havoc and the damage is often long-lived. Businesses shut down, investment spending is cut, and people out of work can lose skills and motivation as the months stretch on. But the recession brought on by the COVID-19 pandemic is no ordinary recession. Compared to previous global crises, the contraction was sudden and deep—using quarterly data, global output declined about three times as much as in the global financial crisis, in half the time.

 
Systemic financial stress—associated with long-lasting economic damage—has been largely avoided so far, owing to the unprecedented policy actions taken. However, the path to recovery remains challenging, especially for countries with limited fiscal space, and is made harder by the differential impact of the pandemic.

 
Lessons from history

The extent of the recovery will depend on the persistence of the economic damage, or “scarring,” in the medium-term. This will vary across countries, depending on the future path of the pandemic; the share of high-contact sectors; the ability of businesses and workers to adapt; and the effectiveness of policy responses.

These unknowns make it hard to predict the extent of scarring but there are some lessons we can draw from history. Severe recessions in the past, particularly deep ones, have been associated with persistent output losses from reduced productivity. Although the pandemic has spurred increased digitalization and innovation in production and delivery processes—at least in some countries—the resource reallocation needed to adapt to a new normal may be larger than in past recessions, affecting productivity growth going forward. Another risk is the pandemic-driven rise in market power of dominant firms, which are becoming increasingly entrenched as competitors collapse.

Productivity has also been affected by COVID-19 disruptions to production networks. High-contact sectors, such as arts and entertainment, accommodation and restaurants, and wholesale and retail trade are less central to production networks than, say, the energy sector. But historical analysis shows that even shocks to these peripheral sectors can be greatly amplified through spillovers to other sectors. The closure of restaurants and bars, for example, can affect farms and wineries, resulting in lower demand for tractors and other agricultural equipment. So, although the pandemic’s initial impact was concentrated in higher-contact service sectors, given the size of the disruption, it still resulted in a broad downturn.

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Πηγή: blogs.imf.org