Pandemic-induced scarring in DMs less than feared: Fitch Ratings

November 22, 2021 (MLN): The Covid-19 pandemic will reduce major developed markets (DMs) medium-term supply-side potential GDP growth but the damage will be significantly less than initially feared in the early days of the health crisis, as per the report published by Fitch Ratings on Sunday.

“Investment is more resilient than we expected and actual and long-term unemployment have not increased as much as initially forecast, helped by unprecedented policy support,” the report noted.

The findings of the report anticipated that the medium-term economic recovery of the DMs will be much faster than in the aftermath of the global financial crisis in 2008-2009.

The scale and speed of the macro policy response to the pandemic were unprecedented, cushioning private-sector balance sheets and supporting aggregate demand. The strength of policy-driven demand has prompted businesses to boost manufacturing capacity. The pandemic has also accelerated information technology usage.

It is expected that the pandemic to knock only 0.1pp per year off potential growth across most large DMs from the pre-pandemic period, it said.

The small hit to potential growth stems from expectations of slower labour force growth, driven by more older workers leaving the labour force permanently and lower net immigration in some regions. Also, the time it takes for labour to re-allocate from shrinking to growing industries may increase labour market mismatch.

With regards to the inflationary pressure, the report underlined that the pressure of core inflation has intensified over the past few months, reflecting short-term bottlenecks in global goods markets.

However, the latest estimates of supply-side potential suggest output gaps will remain negative in most major DMs in 2022, limiting upward pressure on inflation.

Nevertheless, the estimates show a significant positive output gap in the US in 2022.

“We see underlying inflation gradually easing unless policymakers keep macro support elevated for longer than expected,” it added.

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