Shifts & Narratives #5 – A unique crisis that opens the way to multiple regime shifts

June 7, 2021

The Covid-19 crisis is exceptional in many ways. It is the most serious health crisis since the Spanish flu a century ago. This crisis resulted in an unprecedented contraction of activity in 2020 and in the deepest global recession since World War II. However, this recession has been the shortest and was not accompanied by a financial crisis thanks to fiscal and monetary policy responses, which have cushioned the economic shock. The exceptional measures put in place aim to buy the time needed to emerge from the health crisis.

The pandemic is not over yet, and is not even under control in many countries, especially in emerging market (EM) economies. However, the ongoing vaccination campaigns are paving the way for a recovery, at least in most developed economies (DE). Uncertainty about the global economic outlook remains high, mainly due to the evolution of the pandemic. After an estimated contraction of 3.3% in 2020, the IMF expects global GDP to grow at 6.0% in 2021, moderating to 4.4% in 2022. Real GDP growth has been revised upwards since the beginning of the year thanks to additional fiscal support in some major economies and the (expected) success of the vaccination campaigns.

Global growth is expected to moderate in the medium term, due to lower supply potential and ageing populations (lower working-age population growth) in both DM and EM economies. History has taught us that major pandemics leave deep scars on the economy. Thanks to the unprecedented policy mix, the Covid-19 crisis should leave fewer scars than the Great Financial Crisis (GFC) in advanced economies. This may not be true in emerging economies, which have been hit harder than advanced ones.

The absence of a financial crisis does not mean that the foundations are strong. The Covid-19 crisis has damaged significantly the global economy. Economies have become more fragile. Output losses have been particularly large for countries that rely on tourism and commodity exports and for those with limited policy space to respond. Inequalities have increased: young people, low-skilled workers, and women have been particularly affected, especially in emerging economies where an additional 95 million more people fell below the extreme poverty line in 2020. Income inequality has increased in both advanced and emerging economies.

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