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After the pandemic: Medium-term growth uncertainties

The coronavirus is set to have a very large short-term negative impact on world growth. But the medium-term growth outlook is more uncertain. Much depends on the policy response – a strong and well-designed response could contain the medium-term output losses, but large and enduring damage is a risk.Growth patterns after significant GDP declines vary. Historical evidence points to large upfront effects from pandemics and natural disasters, but the medium-term outcomes are mixed, with policy responses a crucial determinant. Longer recessions and financial crises tend to lead to weaker medium-term growth.The coronavirus may trigger annual GDP declines among the worst seen in the last 100 years. Economies can bounce back sharply after such declines, but our analysis suggests output losses also endure in a significant number of cases.The US interwar experience shows the danger of allowing financial distress to snowball and exacerbate GDP declines. The weakness of medium-term growth after the global financial crisis confirms the long-term impact of such distress.A key risk for the medium term is that firms and/or households react to the coronavirus recession and disruption by raising savings, accelerating a shift toward ‘Japanification’ of major economies.Our baseline forecasts envisage moderate medium-term output losses due to coronavirus, in part reflecting rapid and large-scale policy interventions. But uncertainty around this forecast is significant and considerable variation is possible across economies.

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