The COVID-19 pandemic is set to rob the global economy of more than US$5 trillion of growth over the next two years, greater than the annual output of Japan.
That is the warning from Wall Street banks as the world plunges into its deepest peacetime recession since the 1930s, after the virus forced governments to demand that businesses close and people stay home.
Although the downturn is predicted to be short-lived, it would take time for economies to make up the lost ground. Even with unprecedented levels of monetary and fiscal stimulus, GDP is unlikely to return to its pre-crisis trend until at least 2022.
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That is a similar timescale to the aftermath of the global financial crisis more than a decade ago, though the recovery could yet prove even more sluggish than economists are predicting.
It underscores the massive task for policymakers, who must deliver enough stimulus to drive the rebound, but avoid reopening their economies too soon and allowing the virus to return.
“Trajectory matters a whole lot,” said Catherine Mann, chief economist of Citigroup Inc, which expects a global hit of about US$5 trillion. “If your trajectory is positive, that is supportive of business confidence and supportive of individuals feeling they can go get a job. That’s a critical ingredient going into the second half of the year and 2021.”
JPMorgan Chase & Co economists put the lost output at US$5.5 trillion, or almost 8 percent of GDP, through the end of next year.
The cost to developed economies alone would be similar to those witnessed in the recessions of 2008-2009 and 1974-1975.
Morgan Stanley said that despite an aggressive policy response, it would be the third quarter of next year before GDP in developed markets returns to pre-virus levels.
Deutsche Bank AG said the “lingering cost and scarring effect” would leave the US and EU economies alone US$1 trillion below pre-virus expectations by the end of next year.
The WTO on Wednesday said that the pandemic could cause a deeper collapse of international trade flows than at any point in the postwar era. The IMF is due to announce its latest forecasts as part of its spring meeting — to be held virtually — next week.
European Central Bank President Christine Lagarde yesterday said that each month of lockdown is costing the eurozone economy 2 to 3 percent of economic output.
The numbers risk masking the human toll of the crisis. As well as the mounting death count, businesses would lose income and many would be forced to close. Millions of employees would be cast out of work.
The International Labour Organization said this week that more than 1 billion workers are at high risk of a pay cut or losing their job.
“It is going to be temporary, but it is putting stress on everything,” Blackstone Group CEO Steve Schwarzman told Bloomberg Television this week.
Governments will need to coordinate. The Bank for International Settlements has said that disjointed national efforts could lead to a second wave of cases, a worst-case scenario that would leave US GDP close to 12 percent below its pre-virus level by the end of this year.
Berenberg chief economist Holger Schmieding said that governments might need to keep heavy restrictions on travel later this year or next year to prevent the pandemic from recurring.
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