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Crises not only plunge economies into recession in the
near-to-medium term, but they can also inflict long-term damage.
The oil shocks of the mid-1970s and early 1980s were a major cause
of sluggish productivity growth for the following decade and a
half. The Global Financial Crisis of 2008-09 was, in part,
responsible for lower growth in total factor productivity, labor
force, and business fixed investment (the determinants of potential
GDP) in the 2010s. Recent estimates suggest that the actual level
of potential real GDP by 2019 was 5-8% lower compared with
projections that were made before the Global Financial Crisis. The
coronavirus disease 2019 (COVID-19) pandemic may have similar
impacts on the determinants of long-term economic growth.
Labor force
The labor market carnage fallout in the wake of the pandemic can
only be described as massive. By some estimates, as much as
one-third of job losses and one-fifth of the income losses may be
permanent. Long-term labor market damage is likely to be
concentrated by industry (e.g., travel and entertainment) and by
demographic group (e.g., minorities and low-skilled workers).
Sustained high unemployment will also lead to people dropping out
of the labor force (as they did in the 2010s) and to a sustained
loss in skills and productive capacity. Restrictions on immigration
will further hurt labor force growth. On the plus side, the shift
to work-from-home could increase labor force participation by
parents with younger children.
Capital stock
The massive increase in uncertainty that has accompanied the
pandemic will significantly reduce the appetite among businesses to
take risks and to make investments in equipment, structures, and
intellectual capital. Less investment, along with the tsunami of
bankruptcies, will result in a lower capital stock than otherwise
might have been. Rapidly rising corporate debt levels will also
discourage capital investment. In addition, lower utilization rates
of physical capital such as planes, sports facilities, and hotels
will hurt the productivity of capital. On the plus side, the need
to rely less on an infection-prone work force may induce companies
to substitute capital for labor (e.g., by making more investments
in robotics).
Total factor productivity
The overall efficiency of economies (total factor productivity)
has also taken a beating since the onset of the COVID-19 virus. The
decimation of global supply chains and the sharp deceleration of
globalization has added to the woes of many manufacturing
industries and worsened their productivity performance. While
welcome in some ways, remote work has also become an obstacle for
key business activities such as completing projects on time and
training new workers. On the plus side, accelerated trends in
digitization will improve productivity, at least in the long
run.
While it may be a little early to fully quantify the long-term
economic impact of the pandemic, IHS Markit estimates that by 2030
the level of real GDP for key developed economies could be 2.0-5.0%
lower compared with a no-pandemic scenario. In our August forecast,
after a contraction of 5.1% in 2020, global real GDP is projected
to expand at a 3.5% annual rate from 2020 to 2025. Growth settles
to annual rates of 2.8% from 2025 to 2030 and 2.6% from 2030 to
2040.
Posted 24 August 2020 by Sara Johnson, Executive Director – Global Economics and
