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Covid scarred the global economy in permanent but unequal ways


Natale Labia writes on the economy and finance. Partner and chief economist of a global investment firm, he writes in his personal capacity. MBA from Università Bocconi. Supports Juventus.

How healthy is the global economy, and where is it going? The World Economic Outlook, published by the IMF last week, is a useful pulse check of where the world is and where we can expect it to go. It does not make for easy reading.

In sum, while things are better than perhaps could have been expected, it seems as if a lot of the potential growth post-pandemic was front-loaded into the past three years. The growth outlook, therefore, looks moribund.

The International Monetary Fund (IMF) makes three things clear. First, the global economy has effectively enjoyed what it terms a “soft landing”. From 2021, coming out of the pandemic, for various reasons prices surged and the world endured the most rapid bout of inflation since the 1970s. However, since then inflation in almost all parts of the world has moderated with supply-side bottlenecks easing. This has occurred without a recession, as many – including this columnist – had forecast would have to be the case.

Second, the IMF argues that the consequence of this “immaculate disinflation” and better-than-expected recovery is that the outlook for global economic growth is “at its lowest in decades”. The extraordinary level of fiscal easing, particularly in the US, has come with a cost. A lot of the potential economic growth over the next decade has in effect been front-loaded into the immediate three to four years following the pandemic. 

As the IMF states, “the pace of expansion is low by historical standards. This is due to near-term factors, such as still-high borrowing costs and withdrawal of fiscal support. But it is also a consequence of the longer-term effects such as the Covid-19 pandemic, Russia’s invasion of Ukraine, weak growth in productivity, and increasing geoeconomic fragmentation.”

Regionally, the growth outlook for America continues to be more robust than elsewhere, with the IMF forecasting GDP growth of 2.7% in 2024 and 1.9% in 2025. However, inflation is yet to come down to the critical level of 2% and therefore interest rates will have to remain higher for longer. The outlook could well darken further.

For Europe, growth expectations are dismal, with the IMF forecasting 0.8% growth this year and 1.5% for 2025.

But the most profound insight the report makes, and one which has perhaps been overlooked, are the asymmetric effects of the Covid pandemic and lockdowns. For some, in particular the US, the rebound has in fact been faster and more powerful than what had been forecasted before Covid. Thanks to such generous fiscal support the US economy is now at a higher level than it would have been without the pandemic.

By contrast, for low-income countries the scarring effects of Covid have been profound. Not only are emerging markets on a materially lower track of development to what was forecasted in January 2020, the growth outlook for such economies has actually deteriorated since October 2022. 

Immediately after the end of the pandemic economists expected that low-income countries, such as South Africa, would suffer a 6% contraction to GDP, given their inability to support economic activity through the lockdowns as happened in the US and Europe. 

But the picture has worsened further. Following the price shock and the surge in interest rates in 2023, the IMF now estimates that low-income countries will be even worse off, with growth forecasts thrown off course to the tune of 7%. 

For low-income countries, therefore, there has been no soft landing. Every indicator – growth, inflation, private consumption, capital formation, labour force and employment – has moved in the wrong direction. 

As reported by Ed Stoddard in Daily Maverick, the report makes it clear that South Africa is a typical example of such an economy. It had lacklustre growth expectations in January 2020, but as a result of the pandemic the outlook has only become bleaker. South Africa simply could not afford to adequately support its economy through the lockdowns and increase investment after the pandemic. The effects of this underinvestment on infrastructure, capital formation and job creation are both evident and profound.

Read more in Daily Maverick: IMF warns that global inflation risks remain, cuts SA’s GDP 2024 growth forecast to 0.9%

The economic scarring of the pandemic therefore seems to be more enduring than expected. Wealthy economies such as the US may have emerged stronger than ever but the longer-term outlook looks worse than it has for decades. 

For emerging markets, such as South Africa, not only have the past four years been almost entirely devoid of growth, but the socioeconomic scarring, as a result of these lost years, looks deep and permanent. Particularly for the worse-off, the social, economic and psychological effects of the pandemic will live with us for years, if not decades, to come. DM


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