The COVID-19 pandemic has brought huge social and economic uncertainty to the global economy. In the short-term, the world economy is in the process of contracting on a scale far greater than witnessed during the 2008/9 Global Financial Crisis.  Indeed, some countries are likely to experience economic reversals matching those witnessed during the Great Depression in the 1930s.

While there is an emerging consensus amongst forecasters that economic activity will thereafter bounce back strongly, there is also broad acceptance that the level of economic activity will be permanently lower than it would have been in the absence of COVID-19. The extent of this ‘scarring’ is difficult to estimate, as most countries are still in the first phase of their fight against the pandemic. Lockdown measures are curtailing economic activity, driving up unemployment, and depressing international trade. The longer they continue, the greater the negative economic impact will be.

In the long-term, a return to the pre-COVID economic trajectory seems unlikely, even if recoveries prove to be U- or V-shaped. According to the International Monetary Fund, the cumulative global output loss by the end of 2021 could be equivalent in scale to the Japanese and German economies added together. Some nations – mostly in the emerging world – face a particular struggle to recover.

Central banks and governments have already committed trillions of dollars to keep households and businesses afloat, and prevent financial markets from seizing up. This bridge-building will be more effective within nations than across nations. Even when countries lift their internal lockdown measures and re-open their economies, a state of “external lockdown” will likely remain in place. Nations will simply not be able to re-engage with a prosperous and dynamic world economy. Whatever policymakers achieve domestically, they cannot fully offset the impact on a country’s exports (and, hence, its overall GDP) of collapsing demand elsewhere. We may see more ‘social distancing’ between countries as they emerge from lockdown at different times. This will likely mean that relationships between countries – which were already changing – are fundamentally reshaped.

Such developments could fuel a further ramping up of the anti-globalisation narrative that had become prevalent before the pandemic began. There was already significant disagreement over whether the existing rules and institutions that govern international trade and commerce are fit-for-purpose. The threat to the old “rules-based” system will intensify as global economic co-operation dwindles. This will make even more important those initiatives underway to promote trade liberalisation, especially in Asia. The countries involved and the new blocs created could have an opportunity to largely define their own rules and standards.

The cost of bridge-building will be most visible in the form of much higher levels of government debt, akin to increases more typically seen during wartime. At this stage, the consequences of these hefty debt increases are unclear. The better the bridge, the bigger the economic rebound and the more digestible the debt becomes. Wartime experience suggests, however, that significant scarring could lead to either higher inflation, more austerity or, for countries in desperate financial circumstances, capital controls or default.

Technology could potentially have a significant impact. Just as the post-war technology boom boosted US economic recovery in the 1950s, the war against COVID-19 will also lead to significant technological changes that, in time, will trigger major shifts in how societies operate. Not all of these shifts, however, may be positive for all.

One obvious change is the likely proliferation of home working, an outcome that may significantly reduce time spent on travelling to places of work. In turn, this might lead to a reduction in office space and an increased supply of property for residential purposes. A second related change is a likely proliferation of ‘virtual’ meetings and ‘virtual’ conferences: audio-visual quality will doubtless improve at a rapid rate in coming quarters and, as it does so, the need for physical meetings will decline. This will both reduce costs for companies and limit the business risk associated with heightened restrictions on the cross-border movement of people. It will also reduce the amount of air travel needed. In all of these cases, there may be a significant and lasting climate ‘dividend’.

A third change – again already happening before the COVID-19 lockdowns – is the use of automation and artificial intelligence to shorten global supply chains and encourage ‘reshoring’, leading to a growing income gap between already-industrialised economies and the rest. This process may be accentuated through the economic consequences of COVID-19. Governments may increase their preparedness against other rare but high-impact risks through a renewed and widened focus on ‘strategic industries’ and ‘national champions’. Such policies might help Governments to demonstrate to their citizens how they are putting their interests first, but they also underline why protectionism is likely to be one response to COVID-19. It would also be regrettable if global economic co-operation is undermined precisely when broad international agreement will be required to implement many of the policies needed to mitigate the considerable risks to the global economy associated with the long-term consequences of COVID-19.

Download the full report：AFTER THE PANDEMIC: THE MEDIUM AND LONG-TERM IMPACT  OF COVID-19 ON THE GLOBAL ECONOMY