Covid is a true black swan event, something that most of us are likely to experience just once in our lifetime. Not only has it led to massive social disruption, but the recession brought about by it has no parallel in human history. Compared to previous global crisis, the economic contraction was sudden and deep … as per quarterly data, global output declined about thrice as much in the global financial crisis, in about half the time. All over the world, governments responded well, using all the policy tools at their disposal. Many unprecedented policy actions were also taken. However, the path to a sustained recovery remains rocky, especially as a new wave of Covid is already upon us now, fuelling fears of a further economic slowdown.
All over the world, fiscal space is shrinking and a sustained revival is made more difficult by the differential impact of the pandemic. Globalization has ensured that we are now all in the same boat, and so it is difficult for someone to flourish when someone else is sinking. The extent of the recovery will depend on the persistence of the economic damage (called scarring) in the medium-term. That will obviously vary across countries and regions.
History has some vital lessons to teach us. Previous recessions, particularly deep ones, have been characterized by economic losses due to falling productivity. Although Covid has spurred increased digitization across all sectors of economic activity and the creation of some unique workplace practices (work from home, for example), the resource reallocation needed to adapt to a new normal is likely to be larger than in past recessions. This is going to impact future productivity growth, mainly as far as the smaller industrial players (chieflyMSMEs) are concerned.
Covid primarily impacted the high-contact sectors, such as entertainment, tourism and hospitality. Even though these remain less central to mainstream production networks than, say, manufacturing, historical analysis shows that in today’s integrated economy shocks to these peripheral sectors can be greatly amplified through spillovers to other sectors. Thus, even though the pandemic’s initial impact was concentrated in the high-contact service sectors, given the extent of the disruption, it still affected the entire economy and resulted in a broaderslowdown.
Covid’s differential impact amongst countries is the result of varying economic structures and the fiscal response of governments. With the emergence of new strains of the virus, countries will need to tailor their responses to the different stages of the pandemic. This will include a policy combination of better-targeted support for affected households and businesses, as well as public investments. Disaster management planning will also need to be reinforcedglobally.
As vaccine coverage improves and supply constraints ease, we will hopefully see the end of the harmful socioeconomic effects of the pandemic. Finally, strong international cooperation will be needed to address the growing socioeconomic divergences across countries. Covid has posed the global economy its biggest challenge in decades (if not centuries), and developing countries need all the help they can get to prevent further scarring.