Global outlook c h a p t e r 1

particularly vulnerable, especially when there is a 
high degree of interconnectedness between the 
government and the banking system that could 

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amplify financial stress. The growing role of 
nonbank financial companies adds further 
uncertainty about financial sector dynamics, as 
these companies are more opaque than 
conventional 
banks 
and 
may 
react 
in 
unpredictable ways during periods of stress (ESRB 
2019). 
Recessions that feature financial crises are 
significantly deeper and longer than recessions that 
do not (figure 1.16.D). Against this backdrop, 
widespread financial crises, combined with a 
prolonged pandemic and delayed vaccination, 
could result in a double-dip global recession, with 
a further contraction in activity this year, as 
illustrated by the severe downside scenario 
presented in box 1.4.
Greater long-term damage from the pandemic
Both recessions and epidemics can have lasting 
negative effects on the growth of affected countries 
through a variety of channels (figure 1.17.A; Arthi 
and Parman 2020; Dieppe 2020). These events 
can bankrupt otherwise viable firms, keep workers 
from jobs, damage financial systems, and increase 
debt burdens. Epidemics also lead to lost 
schooling and worse health outcomes. COVID-19 
is expected to cause a significant drop in potential 
output growth relative to pre-pandemic trends 
(figure 1.17.B; chapter 3). The fact that the 
ongoing pandemic and ensuing global recession 
have been more widespread, more severe, and 
more long-lasting than any of the previous 
episodes over the past eight decades raises the 
possibility of even more significant economic 
damage (Chudik et al. 2020). The very severity of 
the shock may cause behavioral changes—a 
persistent increase in people’s assessment of the 
probability of an extreme negative shock would 
reduce the return on investment and result in a 
smaller stock of capital (Kozlowski, Veldkamp, 
and Venkateswaran 2020). 
The risk of greater long-term damage becomes 
more likely if the pandemic lasts longer than 
expected and cannot be brought fully under 
control, if infections cause severe chronic health 
effects, or if waning policy support impedes a 
meaningful recovery. Costly reconfigurations of 
production could cause some economies to reach 
supply constraints earlier than expected, which 
could contribute to an earlier-than-expected 
resurgence in inflation. If monetary stimulus is 
withdrawn as a result, high debt levels would raise 
the risk of financial crises.
The debt accumulated during the pandemic will 
represent a heavy burden for some borrowers for a