It’s been a long and challenging battle to manage the competing health and economic risks of the Covid-19 pandemic. Most of us are hopeful that a future without the virus – one which is not too different to the pre-pandemic version of normalcy – lies in the not-too-distant future.

But what if a growing number of experts predicting that Covid-19 will never be eliminated are right, and that it does become endemic – an ongoing feature of life, much like the flu? What impact could this have on the global population and economy in the medium to long term?

In countries like Singapore and Australia, we are already getting an early taste of what may lie ahead. These countries adopted zero-Covid policies, hoping to vanquish the virus entirely by finding, testing, tracing, isolating and supporting Covid-19 positive individuals until herd immunity could be achieved. 

However, 15 months into the pandemic, the Delta variant has seen Covid-19 return notwithstanding their zero-tolerance approaches and progress towards herd immunity. Singapore, for instance, is near as dammit to reaching the 75% previously considered to be herd immunity. Localised lockdowns are being enforced to prevent the further spread of infections and restrictions on businesses are being reimposed with varying degrees of stringency.

Scepticism about whether herd immunity will be achievable is also on the rise, given various factors. These include the highly infectious Delta variant that could well increase herd immunity targets to realistically unachievable levels, vaccine resistance and the possibility of future, most likely even more virulent, mutations.

Should Covid-19 indeed prove endemic, it is likely to be a considerably slower journey to get the global economy back onto an even keel; a period during which we will need to temper expectations of how long it will take to unwind economic policies and stimulus and return to sustainable growth rates reflective of a stable and healthy global economy. 

It will also depend on the extent to which the global economy has been scarred by the pandemic to date; something we cannot quantify yet because the economy is still running on the steroids of massive stimulus programmes. The Economist recently pointed out that it remains to be seen whether economic scars have been avoided or merely deferred.

There are different types of scarring, too, that could have significant economic impacts. In a working paper titled “Macroeconomic effects of Covid-19: a mid-term review”, author Phurichai Rungcharoenkitkul brings up the concept of “belief scarring”. He points out that the pandemic could leave lasting impressions on people’s beliefs and influence their behaviour long after it is gone (if that does prove to be the case).

He refers to research done by Kozlowski et al (2020), which posits: “Because a pandemic precipitates resource allocations and capital obsolescence, concerns about future pandemics can have significant effects on today’s risk premium and investment.” According to their estimations, this “belief scarring effect” could impose a long-term cost that is 10 times the short-term GDP loss.

The impact of belief scarring on the economy is not likely to be the only behavioural scarring that could be long-lasting. The shifts in attitudes towards working conditions, entertainment, socialising, travel and any other behaviour profoundly disrupted by the pandemic will only be known and quantified many years down the line.

When it comes to the output losses that could be expected based on current forecasts, Rungcharoenkitkul says the median output loss is expected to be about 6.5% in 2020, narrowing by two percentage points to 4% of the pre-pandemic trend by the end of 2021. Critically, he says: “There is, however, a high dispersion of economic losses across economies, reflecting varying exposures to the pandemic and societies’ responses.”

 The IMF has shone the spotlight on the concerning divergence in growth experiences and outlooks between the advancing and developing economies due to the pandemic. In a recent working paper, the organisation delved into the after-effects of the Covid-19 pandemic. It spelt out what it believed the prospects for medium-term economic damage were likely to be.

It expects world output to remain 3% lower in 2024 than pre-pandemic projections. But these sizable medium-term losses don’t adequately reflect what is likely to be a significant variation across countries and regions. These estimates don’t take into account a future that includes an endemic Covid-19 virus. These medium-term outlooks for Covid-19-induced damage could well prove optimistic if that does prove to be that case.

Much of the global economic recovery prospects will be dependent on the trajectory of monetary and fiscal policy and how the massive stimulus programmes are unwound during the years ahead. Once again, an endemic virus could raise the hurdle on when and how central banks reduce their balance sheets, with the US Fed’s balance sheet (now at $8-trillion), double the level it was just before the pandemic and more than eight times its size before the 2008 financial crisis.

He says the pandemic could cast a long shadow on the policy landscape for years, if not decades to come. Fiscal backstops, according to Rungcharoenkitkul, have been equivalent to 12% of global GDP, and he notes that any major bankruptcy events, “a non-negligible risk”, could make further fiscal commitments necessary.

Regarding monetary policy, he comments: “High public debt levels coupled with low growth could present challenges for central banks when the time comes to rebuild policy space. Monetary policy normalisation, even if justified on macroeconomic grounds, could be subordinate to fiscal sustainability concerns. As a result, the low-for-long interest rate environment could be further entrenched by the pandemic, putting even more burden on macroprudential policies to deliver on financial stability.”

While it is sorely tempting to envisage a future free of Covid-19 – with hard lessons learnt but an economy that is, at some point in the next few years, completely open for business – the nature of this virus is to change the game. With the growing possibility that it could become endemic to society, our hopeful expectations of a different future risk turning into a mirage. BM/DM