## After-Effects of the COVID-19 Pandemic: Prospects for Medium-Term Economic Damage

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**Canonical URL:** [After-Effects of the COVID-19 Pandemic: Prospects for Medium-Term Economic Damage](https://www.imf.org/-/media/files/oap/oap-home/2021/april-2021-weo-ch2-oap.pdf)

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### A unique crisis (April 2021 World Economic Outlook, Chapter 2)
- The COVID-19 pandemic led to a unique recession:
  - Severe: output declined three times as much as in the GFC, in half the time
  - Global, but with differential impacts within and across countries
  - Great uncertainty about the recovery path
- Chapter questions addressed:
  - Lessons from past on prospects for scarring, and channels through which it occurs
  - Importance of sectoral spillovers in propagating shocks to the broader economy
  - Implications of the COVID-19 crisis for medium-term outlook and divergence

### Channels of scarring
- Scarring defined as persistent damage to supply potential from job losses and firm bankruptcies, and resulting loss of economic ties in production and distribution networks.
- Main channels:
  - TFP
    - loss of firm-specific know-how due to bankruptcies
    - obstacles to resource reallocation
    - reduction in technology adoption and innovation
  - Capital
    - delayed or reduced investment during the crisis
    - debt overhang, uncertainty, and tighter financial conditions after the recession
  - Labor
    - discouraged unemployed exit labor force
    - education interruptions affect long-term human capital accumulation

### Evidence on medium-term output losses (historical analysis)
- Sample and method:
  - About 600 recessions in 115 countries, from 1957-2019
  - Local projection method with standard macroeconomic control variables
  - Past modern pandemics and epidemics include Hong Kong flu, SARS, H1N1, MERS, Ebola, and Zika
- Key empirical findings:
  - There are permanent output losses, on average, after all types of recessions
  - The greatest scarring has occurred following financial crises
  - In typical recessions, losses in GDP per capita occur mainly through persistently weaker TFP
  - In financial crises, losses operate through all channels: TFP, capital-to-worker ratio, and employment

### Sectoral spillovers and network effects
- Regression analysis to quantify size and persistence of effects of past shocks on sectoral outcomes:
  - 43 countries, 30 sectors, from 1995 to 2014
  - Compared effects of shocks originating in the same sector, in other domestic sectors, and in foreign sectors
  - Analyzed SUPPLY shocks (sectoral TFP changes) and DEMAND shocks (sectoral government spending changes)
- Findings:
  - Large spillover effects from both supply and demand shocks
  - Network effects amplified the COVID-19 shock:
    - Back-of-the-envelope quantification using past coefficients and actual shocks in the first year of the COVID-19 crisis finds sizable spillovers, up to half of the decline in sectoral gross value added
    - Downstream domestic spillovers from supply shocks dominate; foreign shocks play a limited role

### Expected medium-term output losses and correlates
- Projected losses:
  - Global output 3 percent lower in 2024 than expected pre-pandemic
  - Loss in the GFC was around 8½ percent
- Cross-country patterns:
  - Expected impact less severe than GFC for advanced and emerging economies
  - Largest losses expected for low-income countries
- Correlates of larger medium-term output losses:
  - Smaller losses for countries that implemented larger fiscal responses (above-the-line fiscal measures)
  - Largest impacts for the most tourism-dependent economies
  - Economies with larger services sectors are projected to experience more persistent output losses
  - Large uncertainty remains around these projections

### Policy recommendations to limit persistent damage
- Avoid financial distress
- Tailor the response to the stage of the recovery:
  - Targeted support to affected sectors and workers while supply constraints last
  - Public investment can boost both supply and demand as constraints ease
- Fiscal space permitting, aim for a combined package of targeted support and public investment designed to:
  - Reverse setbacks to human capital accumulation and encourage employment
  - Support productivity, including policies to facilitate resource reallocation
  - Boost investment

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_Source: https://www.imf.org/-/media/files/oap/oap-home/2021/april-2021-weo-ch2-oap.pdf_