To date, the World Health Organization (WHO) believes that COVID-19 is still classifiable as an “epidemic” and not as a “pandemic”. However, given the rapid spread of the virus, many expect pandemic status to be declared shortly. What could be the economic effects of a coronavirus pandemic? Answering this question is premature since the answer depends on the extent of the infection, but in the past several studies have tried to quantify the economic impact of a possible pandemic based on the experiences of the last century. In this note, we review these studies. The main conclusions are summarized in the last section.
The macroeconomic effects of a pandemic
First of all, it is useful to clarify what are the channels through which the spread of an infectious virus can affect the world economy. A first channel is a direct effect on the health system of the countries involved, which are called to bear significant costs for the care of sick people and for measures to contain the infection; these costs include both the expense for medical devices and that for overtime for hospital staff. However, the main damage to the economy is likely to be indirect. Among these we can highlight:
- a reduction in the supply of work due to the illness (or in the most serious cases to death) of a large number of workers or to the need to take care of sick family members, with a consequent drop in productivity;
- the temporary closure of companies, shops, schools, public services to limit contagion in the affected areas;
- a sharp drop in consumer demand, especially in the sectors considered most “risky” (tourism, catering, cinemas and theaters, sporting events, retail sales of non-essential goods, transport);
- a collapse in international trade and foreign investment.
How big are the effects just described?
The results of almost all the studies that have dealt with this topic report simulations based on econometric models of general economic equilibrium. These results, therefore, depend on the characteristics of the models and on the assumptions about the extent of two fundamental variables: the “attack rate” of the virus (ie the percentage of the population that falls ill) and its “lethality rate” (ie the percentage of infected who dies). Generally, the studies analyzed consider scenarios similar to the three ‘900 flu pandemics recognized by the WHO: the Spanish flu of 1918-19, the Asian flu of 1957 and the Hong Kong flu of 1968-69. The attack rate of all three pandemics was estimated to be between 25 and 35 percent, while the lethality rate was between 2 and 3 percent for the Spanish and less than 0.2 percent in the other two cases (WHO, 2009).
We come now to the results of the simulations. Three studies focused on the effects on the global economy:
- McKibbin and Sidorenko (2006) consider three scenarios, which trace the three pandemics of the last century. In the milder scenario (similar to the Hong Kong flu of 1968-69), deaths amounted to 1.4 million and the negative effect on world GDP in the first year after the outbreak of the pandemic is equal to 0, 7 percentage points; in the “moderate” scenario (similar to the Asian flu of 1957), in which 14 million deaths are expected, world GDP is reduced by 2 percentage points compared to the expected growth, while in the more “severe” scenario (similar to the flu Spanish 1918-19), where deaths rise to 71 million, the drop in the first year reaches 4.8percent. It is important to note that, even in the most unfavorable scenario, the impact of the virus on the economy is reduced in the second year and tends to fall almost completely starting from the third, when the GDP begins to converge at a level only slightly lower than that predicted before the pandemic (since deaths permanently reduced the job offer). Two other results deserve to be highlighted: (i) the macroeconomic effect is stronger in low-middle income countries, due to the greater difficulties in containing the virus and the capital flight to safer countries; (ii) inflation in most countries increases, as supply-side shocks (lower labor supply, higher production costs for businesses), which push prices upwards,
- Burns et al. (2008) resume the Spanish flu scenario seen in the previous paper and estimate a 3.1 percent drop in global GDP in the first year, with a stronger negative effect for emerging countries. In this case, however, most of the drop (about two thirds) is due to shocks on the demand side, that is, changes in consumer behavior.
- Verikios et al. (2011) simulate the quarterly effects of two pandemics: an infectious but very lethal virus (attack rate of 3 percent, lethality rate of 10 percent) and a very contagious but not very lethal virus (attack rate of 40 per percent, lethality rate of 0.5 percent). In both cases, the peak of the negative effect on GDP occurs in the second and third quarters following the outbreak of the pandemic; subsequently, the economy gradually returns to the previous trend, settling at a slightly lower level (for the same reason seen above). However, the magnitude of the impact on GDP distinguishes the two scenarios. In the low-contagious virus scenario, global GDP drops by 0.3percent in the first year and 0.1 percent in the second, with a similar effect on employment; the impact on international trade, on the other hand, is double compared to that on GDP, causing greater economic damage for those countries that depend more on trade and tourism. In the scenario with a very contagious virus, on the other hand, in the first year global GDP falls by 3.3 percent, with peaks of 4-4.5 percent in the second and third quarters; for employment and international trade, quarterly peaks are even lower (-6.5 percent and -5 percent, respectively). As already seen in Burns et al. (2008), also in this simulation, the shocks on the demand side determine the very negative effect of the first year.
Other studies have simulated the effects on the economy of some macro areas:
- Keogh-Brown et al. (2008), for example, evaluate the effects on the main European economies of a pandemic with characteristics similar to those of 1957 and 1968-69 (therefore not very lethal). In the basic scenario, the effect on GDP is quite contained, around 0.4-0.5 percent, and household consumption decreases by 1 percent. However, these effects are greatly amplified if it is assumed that, to limit the spread of the virus, the government of each country orders the closure of schools for four weeks: in this case, assuming that about 14 percent of workers are forced to stay. at home to take care of their children, the negative effect on GDP would rise up to 5-8per cent depending on the country considered, while consumption would drop by 9-11 percent. The study also shows how only the discovery and spread of an antiviral vaccine would be able to offset the negative effects of school closures, limiting the fall in GDP below 1 percent.
- A report from the Congressional Budget Office (2006), the American equivalent of our Parliamentary Budget Office, simulated the effects of two different pandemics on the US economy. In the case of a more “severe” pandemic (attack rate of 30 percent, lethality rate of 2.5 percent) and assuming an average absence from work of three weeks, in the first year the American GDP would decrease by 4 25 percent compared to the trend without pandemic; of this drop, 2.25 percent would be due to supply-side shock and 2 percent to demand-side shock. In the milder scenario (attack rate of 25 percent, lethality rate of 0.1 percent, average absence from work for four days), however, the pandemic would reduce GDP by 1 percent in the first year, with equal contribution from the two types of shock.
- Finally, the European Commission (2006), taking up the more “severe” scenario of the CBO report just described and assuming that the pandemic lasts for a quarter, has calculated that the negative effect on European GDP would be 1.6percent in the first year (two-thirds of which due to supply shocks) and 0.5 percent in the second and third years. A part of the fall in GDP would, therefore, be recovered fairly quickly, even if GDP would still converge at a slightly lower level than expected before the pandemic (due to the permanent reduction in the supply of labor, as mentioned above). In this context, the Mediterranean countries (especially Spain and Greece) would suffer worse economic damage because they are more dependent on tourism. If we consider stronger demand-side shocks, of the order of magnitude of those assumed in the CBO report for the USA, the collapse of European GDP would be 3.3 percent in the first year.
What conclusions can we draw?
In general, the following conclusions can be drawn:
- The extent of the economic impact of a pandemic strongly depends on the hypotheses on the seriousness of the contagion: a “mild” pandemic, similar to the Asian flu of 1957 or that of Hong Kong of 1968-69, would have a limited effect on world GDP, typically less than 1 percent per year, while a more “severe” pandemic, similar to the Spanish one of 1918-19, could also produce effects in the order of 3-5 percent per year.
- All the estimated economic effects, however strong, are mainly short-term, which tends to resolve almost completely within a year or so. In the medium term, GDP tends to be only slightly below the level it would have reached in the absence of the pandemic, especially if human losses are contained.
- In the short term, a highly contagious but little lethal virus is more harmful to the economy than a very lethal but little contagious virus, as it is capable of generating stronger shocks in both consumers and businesses. The long-term effect (content), on the other hand, depends exclusively on the permanent reduction of the job offer and therefore on the lethality of the pandemic.
- The effect on international trade is stronger than that on GDP, so the economic damage is greater for the countries that depend more on international trade.
- Emerging countries are most affected, not only because they have greater difficulties in containing the spread of the virus, but also because capital tends to move towards advanced countries, considered safer by investors.
- In determining the extent of the impact, both supply-side shocks (lower labor supply, lower productivity, higher costs for companies, etc.) and demand-side shocks (reduction/modification of consumption due to panic); the effect on inflation depends on which of these shocks prevail.
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Burns, A., Van der Mensbrugghe, D. and Timmer, H. (2006), “Evaluating the economic consequences of avian influenza”, World Bank.
European Commission (2006), “The macroeconomic effects of a pandemic in Europe – A model-based assessment”, EC Economic Papers 251, June 2006
Congressional Budget Office (2006), “A Potential Influenza Pandemic: Possible Macroeconomic Effects and Policy Issues”, The Congress of the United States, Congressional Budget Office.
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Keogh-Brown, M., McDonald, S., Edmunds, J., Beutels, P. and Smith, R. (2008), “The Macroeconomic Costs of a Global Pandemic Influence”. In Global Trade Analysis Project 11th Annual Conference on Global Economic Analysis, “Future of Global Economy”, Helsinki, available at the link https://www.gtap.agecon.purdue.edu/resources/download/3828.pdf
McKibbin, WJ, and Sidorenko, A. (2006), “Global macroeconomic consequences of pandemic influenza”, Lowy Institute for International Policy, Sidney.
WHO (2009), “Pandemic influence preparedness and response: a WHO guidance document”, Geneva, World Health Organization.
Verikios, G., Sullivan, M., Stojanovski, P., Giesecke, JA and Woo, G. (2011). “The global economic effects of pandemic influenza”, General Paper G? 224, Center of Policy Studies (The Impact Project), Monash University.