Economic Impact of COVID-19- April 2021
Updated: May 3
The V-shaped rebound is well underway as vaccine rollouts and ongoing crisis support promise a more 'normal' year for major economies around the world. Nonetheless, despite the momentary breath of air for policymakers, the looming question remains; just how deep will the economic scarring go?
For most countries, the legacies of the pandemic are manifold and treacherous. Job destruction, ballooning public debt, social inequalities and lost education are among the major sunk costs of the pandemic. Many of these effects are also felt unevenly across different countries. Poorer nations as well as Spain and the Philippines have been highlighted as economies most exposed to persistent scarring. Comparatively, Australia's containment measures, ample stimulus and central bank policies including yield curve control and quantitative easing have insulated it from long-term damage, while the US will follow similarly after being propelled by trillions COVID stimulus according to IMF projections.
World Bank estimates in January portended "a decade of global growth disappointments", warning global output would be 5% lower than its pre-pandemic trend should corrective action not be taken. However, the solution is not as simple as a push of a button, and even mass-immunisation may not alleviate the impact of the pandemic on fundamental consumer attitudes and spending behaviour. For example, despite its economic resilience, New Zealand's output has felt the gaping hole left behind by the loss of foreign tourists, contracting in Q4 of 2020. Inevitably, attitudes to consumption will have changed even in the post-recovery stage, and economies will require the dynamism necessary to transition smoothly to meet these behavioural shifts. With global debt reaching a high of US$281 tn, this will likely be just one of many things on nations' agendas looking forward into the next decade.
Ongoing uncertainty should also send major warning signals to labour markets, as workers are likely to be employed in a drastically different, post-covid work environment. For one, innovation and subsequent productivity gains have been accelerated, a strategy used by businesses to circumvent the loss of labour at the height of the pandemic. As a result, further capital-labour substitution is to be expected as McKinsey & Co forecast over 100 million workers may be displaced from their current occupation in light of technological advancements and automation forged in the past year. Coupled with the long-term effect of declining human capital from the closure of schools, Standard Chartered Plc expects that low-wage jobs in marginal sectors will gradually hollow-out. As a result, labour market recovery is expected to be a rocky road ahead, with policymakers scrambling to prevent hysteresis from eroding the productive labour force further.