As we continue to see Covid variants spreading across the globe, it is time to ask what the long-term impact will be of the global lockdowns, shutdowns and stresses to productivity and supply.

We estimate that there is likely to be economic scarring — an "economic long Covid" — that causes a loss of long-term output of 3% of global GDP. In line with our estimate, the UK’s Office for Budget Responsibility has assessed the economic outlook for the UK is 3% below its pre-Covid trend.

Due to the efforts of the world’s central banks, the pandemic was not a financial or a liquidity crisis. And while Covid’s death toll has been tragically high, it is not on the same scales as previous global pandemics such as the Spanish Flu. However, it is important to realize that the Global Financial Crisis (GFC) in 2008 caused significant long-term damage. The global economy remains 35% down on its projected pre-GFC growth trend, which has had a huge impact on economies, businesses and livelihoods. After past pandemics, such as the Black Death and the Spanish Flu, fewer workers meant the cost of labor rose and major populist movements followed.

Will productivity rise?

Significant economic shocks don’t always lead to purely negative outcomes. They can force both individuals and companies out of ingrained, but sub-optimal behavior and into "re-optimization." It could be that working online from home will generate efficiencies. Long-term patterns of production and consumption may change permanently — for example, the boom in home entertainment and home gourmet-food delivery may mean that cinemas and restaurants never go back to pre-Covid strength.

In healthcare, the focused investment that led to the breakthrough development of mRNA vaccines could lead to a wave of medical innovations around treating illnesses and creating new medicines and vaccines, thereby boosting productivity.

However, these positives may not make up for the fact that lockdowns, bottlenecks and supply-chain stresses have led to the supply side of the world’s economy being depressed.

What will the effect be on the labor market?

Recessions tend to leave scars on the labor market. Periods of high unemployment cause the working-age population to lose skills, lose touch with the workforce, and take employment that isn’t suitable. This affects the labor supply and the efficiency of labor markets.

The labor shocks caused by Covid will be varied as countries made different responses. The US allowed unemployment to happen but subsidized it more generously. In Europe, workers were furloughed and paid to keep their jobs.

The pandemic is likely to have caused significant skill gaps as a huge number of education hours have been lost due to school and further-education closures. Younger children are likely to catch up, but for older children — those just leaving school or university, or starting employment — the gaps may be harder to close.

Employers have found that training their new intake remotely is extremely challenging, so a damaging skills gap could continue. Without fully trained and skilled workers, companies will struggle in the years ahead to innovate and remain competitive.

It is possible that the pandemic and its corresponding economic shock will fundamentally change the desire of consumers and businesses to spend and invest.

Will we see "belief scarring" and "zombification"?

It is also possible that the pandemic and its corresponding economic shock will fundamentally change the desire of consumers and businesses to spend and invest. Household savings levels are already at record highs as consumers take a more cautious approach to their finances. If they don’t regain their confidence, subdued spending will pull down economic growth.

For companies, the risk lies in the creation of "zombie" businesses, kept alive by government support and low interest rates when they would otherwise have shuttered for good reasons. The number of zombie companies is on the rise since the pandemic, and this means that good companies are competing against zombies for labor and resources.

The path forward

The task for governments and central banks now is to unwind the support they’ve provided to consumers and companies prudently, while ameliorating the long-term scarring of the economy. They can put training schemes in place to close the skills gap and help the labor force to adapt to a changed economy. More government infrastructure spending will help support the demand side of the economy. Central banks can play their part by normalizing monetary policy gradually and being clear and consistent in their communication.

We believe that all of these measures could help mitigate the predicted 3% loss of GDP that Covid is expected to bring to the world’s economy. The challenge is for governments to act now and central banks to tread carefully.