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IMF points out permanent GDP losses with the pandemic – 10/18/2021



In the economic outlook report released last week, the IMF (International Monetary Fund) slightly lowered its forecast for global economic growth this year to 5.9%, keeping 4.9% for next year. He also highlighted the “divergence” in the pace and extent of economic recovery between countries.

Two factors are highlighted to explain the divergence. First, the different evolution and scope of vaccination in different countries, ie the “big gap in access to vaccines”. The report shows a strong positive correlation between vaccination rates on the one hand and upward revisions in countries’ growth projections since April on the other. The other factor is national differences in the space available to adopt budget support policies.

The IMF spoke of “lasting marks” left during divergent recoveries, with emerging and developing economies showing greater damage than the average for advanced countries in the medium term. For example, in the cases of emerging Asia (excluding China), sub-Saharan Africa and Latin America and the Caribbean, gross domestic products now forecast by the Fund for 2024 are expected to be 9% respectively, 5 % and 4.5% lower than projected before the pandemic, in January of last year. Only the United States and the emerging countries of Eastern Europe appear with a higher GDP than before.

The divergence in the consequences of the pandemic is also manifested in labor markets and in levels of production capacity utilization. The IMF predicts that by 2024 there will be job losses compared to trends before the biggest pandemic among emerging and developing countries.

We must distinguish, on the one hand, the permanent loss of GDP caused by the pandemic and, on the other hand, its consequences on its future trajectory. There is a definite loss when we compare the trajectories that were previously planned and those that were effective with the pandemic. Even if one hypothetically assumed an exact return of the economy to its previous starting point, reverting from there to the pre-pandemic growth rate, all the GDP not generated during the crisis would be permanently lost.

This is a different situation from the crises associated with common industrial or financial cycles in history, as in these cases a period of above normal or trend growth will usually have occurred before. In the pandemic, there is only the loss side.

There is also a high likelihood that the sequelae – or “scars” – will prevent a full return to the level of projected GDP before the pandemic. As in the hypothesis of a recovery in the form of “inverted square root”. In this case, the permanent loss of GDP would include the differences between the projected GDP levels before and after, even assuming a return to the potential growth rate before the pandemic.

As we have seen previously, the pandemic is affecting labor markets. High long-term unemployment leads to skills erosion. The quality and quantity of hours devoted to human capital formation are also negatively affected.

The pandemic will leave further scars, as discussed by Diggle and Bartholomew (2021). It must be taken into account that financial support from the public sector has enabled “zombie” companies to survive, ie unable to generate returns and having difficulty in meeting debt service. Public policy support has prevented the death of viable businesses under normal conditions, but the side effect of zombie creation is, in turn, a brake on the reallocation of resources.

There is also the fact that experiences of strong negative shocks have lingering impacts on the beliefs and moods of firms and enterprises, leading them to higher levels of risk aversion in financial and budgetary decisions. It is no coincidence that historically savings increase during pandemics.

On the other hand, the pandemic has caused a positive productivity shock in sectors where companies are reluctant to accelerate digitization and automation, as some recent surveys of business leaders have revealed. Of course, the challenges related to the need to retrain the workforce have also increased.

The IMF report presented a more positive medium-term scenario for the US economy, including a favorable assessment of the effects of the Biden administration’s fiscal program, whose feasibility of political approval was certainly facilitated by the pandemic crisis. . If desired, the reader can include it among the “positive shocks”.

The scars, with varying depths in different countries, will limit the extent to which the recovery brings their economies closer to pre-pandemic trajectories. The shorter this recovery, the greater the permanent loss of GDP resulting from the differences between the projected GDP before and after. Bad news in particular for emerging and developing economies which, according to the IMF report, are below the “recovery divergence”.

What about the growing trends after the pandemic, that is to say already integrating its after-effects? Is there a reason to expect them to shift up or down as a lasting consequence of the pandemic?

Here, as we observe in this space, there is the danger that national economic policies favor risk prevention and fall back on productive integration beyond the borders that marked globalization in the decades preceding the crisis. global financial market, already under pressure in the opposite direction since then. The primacy of efficiency and cost minimization would give way to security against the risks of shocks on the availability of imports. The supply disruptions that marked the current moment of exit from the crisis can serve as a justification for this.

It remains to be seen how far the lines of demarcation would extend from what will be considered “strategic” by the various countries. But moving towards market closure tends to negatively affect the future development of productivity. We cannot lose sight of the exuberant result in terms of global poverty reduction and lower inequality in national per capita income that has accompanied globalization.

It is also necessary to take into account as a possible positive consequence the strengthening – apparently the case in many countries – of domestic political support for the pursuit of sustainable and inclusive growth. For now, however, there are permanent losses in GDP.

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