Acute or Chronic? the Long-Term Impact of the COVID Crisis on Economic Output

45 Pages Posted: 18 Aug 2021 Last revised: 24 Aug 2021

See all articles by Paul Diggle

Paul Diggle

abrdn

Luke Bartholomew

affiliation not provided to SSRN

Date Written: August 17, 2021

Abstract

There is a substantial literature on the lasting damage to economic output from financial crises. The COVID crisis is not, in the first instance, a financial crisis and nor was the eve of the pandemic characterised by large scale macroeconomic imbalances. But it is not financial crises qua financial crises that cause long term damage, but a number of channels which operate during financial crises and other recessions, some of which are at work now as well. We identify balance sheet repair, belief scarring, labour market hysteresis, slowing structural reform momentum, and policy error as relevant transmissions channels of long term damage at work during this crisis. Our judgement is that the COVID crisis will impart a permanent levels shock to post-pandemic global economic output of 3% of GDP. This is a third the levels damage after the GFC, consistent with the nature of the shock and the more encouraging monetary, fiscal and structural policy responses. But this is still a substantial amount of long-term damage relative to 'typical' downturns, reflecting the depth of the pandemic shock and the channels of damage identified.

Keywords: scarring, hysteresis, long term damage, COVID, pandemic

Suggested Citation

Diggle, Paul and Bartholomew, Luke, Acute or Chronic? the Long-Term Impact of the COVID Crisis on Economic Output (August 17, 2021). Available at SSRN: https://ssrn.com/abstract=3906559 or http://dx.doi.org/10.2139/ssrn.3906559

Paul Diggle (Contact Author)

abrdn ( email )

6 St Andrew Square
Edinburgh, EH2 2BD
United Kingdom

Luke Bartholomew

affiliation not provided to SSRN

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