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The global economy is in for a long and painful haul when it comes to recovering from the ongoing pandemic—a longer haul than many currently appreciate, warned World Bank economist Carmen Reinhart, speaking at the Fortune Global Forum on Tuesday morning.
“The output collapses, the employment losses, the impact on certain sectors of the economy, notably services and entertainment—the combination of events leaves real scars on balance sheets,” she said, adding that many households and businesses are up against insolvency.
“Those vulnerabilities in the balance sheets, they’re under cover,” Reinhart said, noting that for good reason many banks, at the encouragement of governments, have implemented forbearance to buy time for households and firms financially impacted by the pandemic.
But a full reckoning with the economic fallout of COVID-19 will be due in time, said Reinhart. “There’s a difference between a near-term masking of the problem and there not being a problem,” she said.
Historically, output declines this acute and lasting leave real damage to balance sheets, she said, adding that banks, as a consequence of higher exposure to nonperforming assets, tend to tighten lending standards, which will likely compound things further: “The last thing one needs to recover is a credit crunch.”
She also noted that the pandemic’s blows have landed hardest on the poorest and most vulnerable in the global economy. “This crisis is particularly regressive—it’s regressive within countries, with the poorest segments of the population being hit. And it’s also regressive across countries, because it’s the poorest countries that will be facing the biggest spikes in poverty rates and the biggest challenges to almost any social marker, ranging from health to education,” said Reinhart.
What to do about that? In the short term, Reinhart said the strategy has been quickly administered emergency lending, to help governments with limited resources respond to the health crisis and maintain livelihoods.
To ease a credit crunch, efforts like the World Bank’s debt suspension initiative—allowing 70-some countries to use money that would have gone toward debt servicing for COVID response efforts—and on the corporate side, fast restructuring and de-leveraging of balance sheets, will be key, Reinhart said.
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