Global loss of production capacity caused by the COVID-19 pandemic

Abstract

The global economy faces a loss of production capacity among the most severe in at least the past half-century as a result of the recession caused by the COVID-19 pandemic. It will take several years of persistent investment efforts to restore the pre-pandemic level of capacity and put global output back to potential. By using a production function based on the incremental capital-output ratio, we estimate the loss of production capacity for the global economy and for the two main world locomotives, the U.S. and China. To do this, we estimate the production capacity implied in our current recession baseline and the capacity that would have existed in the absence of the pandemic (precrisis scenario). The difference between the two estimates is defined as the loss of capacity generated by the pandemic. The results also allow us to extract some policy implications in terms of mitigation measures and investment requirements.