The new post‐covid long term looks much like the old one

Abstract

▪ We have become more optimistic that the long‐term damage to the world economy from the coronavirus crisis will be less than we originally anticipated, especially because of the rapid rebound of output and financial markets. Our baseline forecasts now estimate the level of world GDP being reduced by less than 1% over the long‐term – a considerable upgrade from a year ago. ▪ Key positives are the fast recovery in output, employment, and asset prices, which have rebounded from 2020's troughs far faster than after the global financial crisis. Early evidence also suggests much less financial ‘scarring’ than after the GFC – the trajectories of bad loans, firm failures, and bank credit standards are much more favourable. ▪ But the rate of long‐term world growth will be low as all the pre‐pandemic drags on growth resurface. After two very strong years in 2021 and 2022, we forecast that world growth will then be modest, averaging 2.7% per year to 2030 – below the long‐term average of the last forty years and lower than in 2011–2019. ▪ Key drivers of long‐term growth – demographic trends, capital stock growth, and total factor productivity growth, will all remain subdued. Growth faces headwinds from structural factors like high public and private debt, a loss of dynamism in the advanced economies, and slower growth in emerging markets. ▪ The pandemic also adds some new downside risks. Some financial scars from the pandemic may emerge later, sustained disruption to supply chains is possible, firms and households may be more cautious, and governments may react to high public debt with excessive austerity. Macroeconomic instability in emerging markets may also further weaken trend growth there.