Pedestrians walk outside the New York Stock Exchange in the US

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The US economy is recovering from the Covid-19 recession, but it can take a long time for some economic “scars” to heal, said Thomas Barkin, president of the Richmond Federal Reserve Bank.

Economic scars refer to damage caused by crises that suppress growth prospects in the medium or long term.

“I am confident that we are close to the completion of this recovery,” said Barkin on Monday at the Credit Suisse Asian Investment Conference, which is practically this year.

“Vaccines are being rolled out, case rates and hospital stays are falling, excessive savings and tax incentives should help finance pent-up demand from consumers who are exhausted from isolation and liberated from vaccines and warmer weather,” he added.

The US economy contracted 3.5% year over year in 2020, the Bureau of Economic Analysis estimated. The Organization for Economic Co-operation and Development (OECD) announced earlier this month that the US economy is expected to grow 6.5% this year and 4% next year.

Covid pandemic “scars”

It took the U.S. job market about a decade to recover from the global financial crisis but is likely to suffer less long-term damage this time around, said Barkin, who is a voting member of the Federal Open Market Committee.

This is because US job losses over the past year have been concentrated in sectors such as home and hospitality, where workers move jobs regularly and therefore move to similar roles and other industries more quickly, he explained.

In addition, an increase in remote working arrangements means jobseekers could find new employment elsewhere without relocation, provided they have the right skills and a reliable internet connection, he said.

“Despite these positive results, I am still concerned that we will see scars,” added Barkin.

According to Barkin, many parents, especially mothers, have given up jobs to look after their children after schools and daycare centers closed to prevent the spread of Covid-19.

While there has been some recovery, the parental participation rate remains about 6 percentage points below pre-pandemic levels, Barkin said.

“If parents who have left the workforce do not return, it will have a long-term negative impact on US growth potential,” he said.

School closings and the move to distance learning will also affect students without access to computers and reliable internet connections – which in the long run can lead to “huge losses” in education and skill levels in the US labor market, Barkin said.

Other possible “scars” identified by the President of the Richmond Fed include:

  • Small businesses have been hard hit by the pandemic, and a reduction in the number of such businesses can lead the US economy to miss “breakthrough productivity gains” that it often makes.
  • While there is no immediate debt crisis in the US, a “huge spike” in federal debt over the past year could affect policymakers’ ability to respond to the next crisis.

To mitigate the economic “scarring”, policymakers should “complete the process to get this virus under control,” Barkin said.

“Scarring, be it on workers, companies or communities, should be much less in a world that is able to go back to normal or in a world where people are still afraid to get on an elevator be “he said.

“The priority now is to distribute the vaccines and safely reopen the economy. We are making good progress here,” he added.