There are things policymakers can do to minimise the permanent scarringby Jagjit S Chadha / May 13, 2020 / Leave a comment
Covid-19 has transformed economic prospects as rapidly as it has comprehensively. And in the main this is because lockdowns have been the tool by which governments have chosen to control the virus. World growth is not only going to stall this year but move significantly into reverse. Year-on-year growth in world income has hovered in the range of 3 to 4 per cent for three decades, and even in the worst year of the financial crisis barely crossed the zero line. Yet we at the institute now expect output to contract by some 3-4 per cent this year and that is the best-case scenario. Any return to our pre-Covid world will have to be staggered and will require a comprehensive rethink of economic practice, in respect of more active and supportive government policies than we have typically deployed for the past four decades.
To say that these are highly uncertain times is a truism. The most reassuring scenario assumes that the measures to control movement and social contact will be eased gradually, permitting a wider range of economic activities to be undertaken as 2021 dawns. That leads to the projection that global GDP will fall by some 3-4 per cent this year, which is an unprecedented downward revision of around 6-7 percentage points from what was broadly expected in February. The fall is substantially larger than that during the great financial crisis. The closest global parallel is the great depression of the 1930s, when there was a multi-year fall in output in many countries, but the comparison is a very rough and ready one and does not really stretch very well to the UK’s situation today.
Once lockdowns are lifted, higher output could lead to marked year-on-year rises in GDP next year. But in many countries, even by 2022, GDP will still be significantly lower than had the pandemic not occurred as economies will be scarred.
Unemployment trends in light of the lockdowns have been shocking. The unemployment rate in the US may have been as much as 20 per cent in April. And some findings show that a third of workers in Canada and the US report that they have lost at least half of their income due to the Covid-19 crisis. The proportion is a quarter in the…