Lasting on Government Debt, Mixed for Growth and Mostly Transitory on Unemployment

The impact of Covid-19 is structural for most countries’ public finances, varies for GDP growth – the euro area is trailing the US and Nordics – but is milder on labour markets compared with the global financial crisis, particularly in advanced economies.

Alvise Lennkh

Click here to download Scope’s report

Scope Ratings says the impact of the pandemic on global economies varies widely, reflecting differences in the severity of the health crisis, underlying economic structures and the policy response.

Many uncertainties remain before it is possible to definitively assess Covid-19’s economic impact on individual countries and the global economy: the virus continues to spread, vaccination programmes are still building momentum, and fiscal and monetary stimulus has varied in scope and effectiveness. Still, there are some initial signals of the pandemic’s impact on government balance sheets, economic recoveries and the labour market.

For 36 countries it covers, Scope compared the IMF’s updated forecasts from last week for these countries for 2024 growth, public debt and unemployment forecasts with 2019 pre-crisis levels as well as against the IMF’s forecasts for 2024 back in October 2019 – the last full IMF forecasting round before the pandemic hit.

Scope’s analysis shows that the Covid-19 shock will have a lasting impact on most sovereigns’ balance sheets.

Some sovereigns mostly unaffected, others unlikely to reverse balance-sheet damage long term

We see evidence of sovereigns whose balance sheets are mostly unaffected, such as that of Russia and Norway, those who could reverse balance sheet deterioration absent further immediate shocks, such as Greece and Cyprus, and finally, those sovereigns that are set to see public debt levels rise markedly without a likely prospect of reversal over the coming years.

The latter group of economies includes the UK, Spain, Belgium, Italy and France.

China, the US and Japan are forecast to continue displaying higher public debt levels in the coming years, but the debt trajectory is now only slightly worse compared with the adverse trajectories already forecasted two years ago.

Economies will recover output lost from crisis at different speeds

Looking at growth, the analysis shows that Ireland, China and Turkey did not experience a growth decline in 2020 while it will take Spain, Greece and the UK three years, and Italy even four years, to return to and surpass 2019 GDP levels.

The US, the Nordics, the Baltics and most central and eastern European sovereigns should see their GDP levels exceed those of 2019 this year, while most euro area sovereigns will have to wait until 2022.

Impact on the labour market likely to be comparatively mild

Contrary to the experience during the great financial crisis, the impact on the labour market is likely to be significantly milder this time around, particularly for advanced economies.

Greece and Turkey are forecast to see their unemployment rates decline by 4-5% compared with levels in 2019 while the impact for most other Scope-rated sovereigns is below 1pp, reflecting, in part, the effective use of furlough schemes reducing job loss and mitigating the crisis impact. Italy’s unemployment rate is the most adversely affected, with a forecasted rise of around 2pp by 2024 compared with the rate in 2019 while Spain’s unemployment rate is now forecast to be 2pp higher in 2024 compared to the forecast made by the IMF two years ago.

For a look at all of today’s economic events, check out our economic calendar.

Alvise Lennkh is the Deputy Head of Sovereign and Public Sector ratings at Scope Ratings GmbH.

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