World Bank dashes hopes of swift recovery

Countries can expect slow bounceback from Covid downturn, warns new chief economist Reinhart

Man with box
Carmen Reinhart, the chief economist of the World Bank, has said a V-shaped recovery is unlikely

The World Bank’s new chief economist has warned the recovery will last even longer than the financial crisis aftermath as China struggles to rescue global growth again.

Carmen Reinhart dashed hopes of a rapid V-shaped rebound by predicting that recoveries in advanced economies will take more than five years on a per capita income basis.

She told The Sunday Telegraph: “I think it will be longer [than the financial crisis recovery]… We are talking upwards of five years. Look, the damage being done is being done really to every sector.”

A forthcoming report by the Washington-based development bank will reveal that the “extremely regressive” Covid-19 shock will mean global poverty rates rise for the first year since 2000.

Ms Reinhart said the economic crisis “hit the most vulnerable hardest” as poorer countries struggled to provide safety nets for citizens.

Lockdowns have triggered record-breaking plunges in GDP across the world but forecasters are split over how deep the economic scarring from the Covid crisis will be.

Ms Reinhart warned economists not to confuse rebounds in early growth indicators with a “true recovery”, dampening hopes that a pick-up could signal a rapid return to pre-virus levels of prosperity.

“There is no big pocket of the economy, except virtual communicating, where you can say this is a very positive environment in which you can expect that kind of V-shaped recovery,” she warned in her first UK interview since joining the World Bank in June.

Advanced economies suffered a slow recovery from the financial crisis a decade ago, with global growth powered by China and huge stimulus efforts by Beijing.

However, Ms Reinhart warned that the “China of 2008 is also not the China of today”, and raised concerns about corporate indebtedness in the world’s second-largest economy. Chinese businesses, particularly exporters, took on debt on hopes of robust growth continuing, but “that has not played out”, she said.

“You have a combination of slow demand for the products of these firms, a lot of debt and a lot of debt servicing.

“There are very big issues with the solvency of the corporate sector in China that we didn’t have 12 years ago.”

The Covid crisis has exacerbated inequalities both globally and also within countries.

Only governments with big enough war chests have been able to prop up worker incomes and businesses, while job losses in the West have been borne by staff on lower incomes. Countries with limited fiscal and monetary firepower to fight the economic fallout of the pandemic will face “a much deeper recession and more protracted recovery”, Ms Reinhart said.

Economic problems in emerging markets risk spilling over into advanced economies.

“Slower growth in those economies means slower growth of global trade and they are about 60pc of the global economy,” she warned.

In June, the World Bank predicted that advanced economies would shrink by 7pc in 2020 before making only a partial recovery next year.

The eurozone was expected to be the hardest hit region, with output set to drop 9.1pc this year.