G20 emerging economies face 'scarring' from pandemic due to weak labour market recovery

Policymakers must act promptly to repair damage from the crisis and prevent decades of diminished economic output from lost human capital, IMF says

The IMF says by taking appropriate action now, G20 policymakers can repair the damage and set the stage for strong and inclusive recoveries in the world’s largest economies. Reuters

G20 members face long-term “scarring” from the Covid-19 pandemic due to a weak recovery in labour markets in emerging economies and severe school disruptions in the group's developing and advanced economies, according to the International Monetary Fund.

In G20 emerging markets, employment rates remain below pre-pandemic projections due to weaker economic recoveries, the Washington-based lender said in a report released on Tuesday.

Informal work — which is widespread in many of these economies — is rebounding strongly from a sharp drop at the peak of the crisis when contact-intensive sectors were hit hard by social distancing measures.

The share of informal work relative to total employment is now exceeding pre-pandemic levels for some G20 emerging economies. It could rise further with the recovery of contact-intensive sectors, which means that these informal workers face lower wages and less access to social safety nets, the report said.

“Policymakers must act promptly to repair the damage from the crisis and prevent decades of diminished economic output from lost human capital,” the IMF said in a blog post on Tuesday.

The fund has lowered its growth forecast for the global economy this year, with Russia’s war in Ukraine severely denting economic prospects and inflation stoked by soaring commodities prices threatening to derail momentum.

The IMF now projects global growth at 3.6 per cent in 2022 and 2023, revising it down 0.8 and 0.2 percentage points from its January forecast, respectively.

The unprecedented school closures during the pandemic have hurt students’ learning across many G20 economies, but particularly students in emerging market economies, the IMF said. Within countries, that impact was more severe for children from poorer families.

“If these learning losses aren’t addressed, affected students could experience a lifetime of depressed earnings,” the IMF warned.

Students currently at school today will account for close to 40 per cent of the combined working-age populations across G20 economies for decades, it added.

“Such long-lasting impacts on the labour force will significantly affect economies,” the multilateral lender said.

Once all these students are in the labour market, gross domestic product for advanced G20 economies could be as much as 3 per cent lower in the long run relative to the baseline scenario, according to the IMF.

“With poorer households suffering the worst learning losses, their prospects could be particularly diminished, further widening income inequality,” the fund said.

There are also other challenges besides the labour market and schooling disruptions.

The increase in corporate debt and vulnerabilities in the industries hit hardest by the pandemic could also contribute to “scarring” by weighing on investment and productivity for years to come, IMF research showed.

Economic scarring — defined as diminished longer-term output relative to pre-pandemic projections — may occur due to pandemic-induced damage to capital, labour and productivity.

However, the extent of scarring is likely to vary across and within countries. Advanced economies likely face a lower degree of scarring than emerging market economies, while vulnerable groups, such as low-skilled workers and current students may face reduced opportunities compared to pre-pandemic expectations, the IMF said.

“Policy action can help heal scars and prevent further wounds. Immediate action is needed to limit and repair learning losses.”

Targeted fiscal measures and implementing structural reforms can help raise productivity-enhancing investments and create jobs, the fund said in its recommendations.

Appropriately adjusting macroeconomic and financial policies can also contain risks of further scarring, it said.

Countries must quickly assess setbacks to learning and implement the appropriate measures to help students, the fund said in its blog post. This could include, for example, additional tutoring or a longer school year.

Support measures for companies and workers that helped limit pandemic scarring, such as credit guarantees and job retention policies, will also need to be scaled back as the recovery becomes stronger.

Instead, policies should shift to helping people adjust to changing labour markets, such as through well-targeted job-search programmes and additional support for training to build new skills, the IMF said.

To limit elevated pockets of corporate distress turning into significant business failures or investment slumps, it’s also crucial to ensure well-functioning mechanisms for corporate insolvency and out-of-court restructuring, the fund added.