Home >Markets >Mark To Market >Pandemics don’t last but IMF warns of permanent damage

The covid-19 pandemic is not the first one the world has seen and may not be the last. But the health crisis has triggered one of the deepest recessions across countries and for some, worse is yet to come. The International Monetary Fund (IMF) believes that there would be permanent scars on potential output of the global economy due to the pandemic, notwithstanding the recent recovery.

“Despite higher-than-usual growth as the global economy recovers from the covid-19 shock, world output is still anticipated to be about 3% lower in 2024 than pre-pandemic projections suggested," the fund said in its world economic outlook report. Factors contributing to this would be a rise in unemployment levels, weak investment and some permanent loss in productivity levels. The IMF points out that past crises show a slower output recovery is mainly due to persistent loss of productivity.

Tough path
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Tough path

However, the fund has lauded the swift monetary and fiscal policies by most central banks that prevented a financial meltdown. “The absence of a financial crisis following covid-19 thus far is favourable, however, the greatest scarring has occurred following recessions associated with financial crises, with permanent deteriorations in TFP, the capital-to-worker ratio, and per capita employment," the fund said. TFP is short for total factor productivity.

Indeed, markets across countries have been buoyed by the ultra-accommodative policies of central banks that have infused an unprecedented level of liquidity. That said, the IMF’s warnings on output loss should be taken seriously as it determines how close market valuations are to actual balance sheet growth of companies.

To be sure, the pandemic has led to small businesses shutting while large corporations have managed to weather the crisis. This may help in the short term, but the fund warns that eventually productivity could be affected negatively. The fund also flagged the worsening inequality within and between countries due to covid-19, and urged nations to address this while formulating fiscal policies. “Policies that reverse the setback to human capital accumulation, boost job creation, and facilitate worker reallocation will be key to addressing long-term GDP losses and the rise in inequality," it said. Here too, there could be variations between advanced and emerging economies due to varying fiscal space. The upshot is that economic recovery would be uneven in 2021 and not easy.

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