World economy faces 'substantial' output loss despite swift recovery from 2020 slowdown

Productivity losses are expected to be lower than what the global economy suffered in the aftermath of the 2009 financial crisis, IMF says

IMF says the world economy is still facing the prospect of a substantial loss in output. Reuters

The world economy is facing the prospect of a substantial loss in output despite a faster-than-expected recovery from the Covid-19 pandemic, according to the International Monetary Fund. Global output in 2024 is expected to be about 3 per cent lower than pre-pandemic estimated levels, the IMF added.

Losses, however, are anticipated to be lower than what the world economy suffered in the aftermath of the global financial crisis, provided the pandemic is brought under control by the end of 2022, the Washington-based fund said in its World Economic Outlook, which will be released next week.

“Expected medium-term output losses from the pandemic shock are sizable, but they exhibit significant variation across economies and regions,” the IMF said.

Countries across the world are rolling out mass Covid-19 vaccination drives to stem the spread of the pandemic, which last year pushed the global economy into its deepest recession since the 1930s. It has, however, bounced back, with faster-than-anticipated growth in China and other markets including the US.

On Tuesday, IMF managing director Kristalina Georgieva said the global economy is on a “firmer footing”, supported by $16 trillion in government stimulus and a rapid Covid-19 vaccine rollout. This has prompted the IMF to upgrade its growth forecast for this year and next.

The overall expected “scarring” from the unprecedented economic contraction last year will be less than what was seen in 2008-09, as financial sector disruptions were contained in the current crisis, the IMF said. However, unlike what happened during the global financial crisis, when advanced economies took a major hit, emerging market and developing economies this time are expected to suffer deeper scars than advanced economies.

“This reflects in part their more muted policy responses, as countries with larger pandemic-related fiscal responses are projected to experience smaller losses,” the IMF said. “After accounting for income differences, economies that are more reliant on tourism, and those with larger service sectors, are projected to experience more persistent losses.”

While the overall outlook has brightened, recovery prospects are “diverging” across countries and regions. The cumulative loss in per capita income, relative to pre-crisis projections, will be 11 per cent in advanced economies by next year. For emerging and developing countries excluding China, the loss will be 20 per cent, according to the IMF.

“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,” Sonali Das and Philippe Wingender, senior IMF economists wrote in a blog post on Tuesday.

“Countries will need to tailor their policies to the different stages of the pandemic with a combination of better-targeted support for affected households and firms and public investments.”

Output losses are expected to be largest among low-income countries, which will have to deploy some $200 billion over five years just to fight the pandemic. A downside scenario of a slower global recovery could add a further $100bn to these financing needs. These nations and will require another $250bn to return to the path of catching up to higher income levels,

Meanwhile, the pandemic’s impact on the global labour market was swift and destructive and “lasting effects of the crisis on workers could be just as painful and unequal”, John Bluedorn, a deputy division chief at the IMF, said in a separate blog post on Tuesday.

Youth and lower-skilled workers have taken a harder hit in both advanced and emerging markets, as well as developing economies. On average, women in emerging market and developing economies have seen a slightly higher rise in unemployment and a larger drop in participation than men. In advanced economies, there is little difference in average unemployment across genders, the IMF said in its labour market chapter of the forthcoming World Economic Outlook.

In the near term, the consequences for these more vulnerable demographic groups are “potentially dire”. Even after the pandemic abates, some of the effects on the structure of employment may be persistent.

“We find that a package of measures to help workers keep their jobs while the pandemic shock is ongoing, combined with measures to encourage job creation and ease the adjustment to new jobs and occupations as the pandemic ebbs, can markedly dampen the negative impact and improve the labour market’s recovery,” Mr Bluedorn said.