People of different backgrounds wearing masks
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The economic fallout of the Covid-19 pandemic in developed economies will prove less severe than first forecast, Fitch Ratings says.

While the effects of Covid-19 will reduce potential GDP growth in major developed markets, the harm “will be significantly less than initially feared in the early days of the health crisis,” the rating agency said in a new report.

Among other things, it noted that investment held up better than expected, and long-term unemployment hasn’t been as bad as feared, “helped by unprecedented policy support.”

Additionally, the recovery “will be much faster than in the aftermath of the global financial crisis in 2008-2009,” it said.

As a result, Fitch said it now expects that the pandemic will only cost 0.1 percentage points per year of potential growth for most large developed markets, compared with pre-pandemic levels.

“The small hit to potential growth stems from our expectations of slower labour force growth, driven by more older workers leaving the labour force permanently and lower net immigration in some regions,” it said.

“Also, the time it takes for labour to re-allocate from shrinking to growing industries may increase labour market mismatch.”

While inflation has soared recently, Fitch said that this reflects short-term supply-chain disruptions.

“Our latest estimates of supply-side potential suggest output gaps will remain negative in most major [developed markets] in 2022, limiting upward pressure on inflation,” the report said.