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Economic impact of the corona crisis: What can we learn from past pandemics?

Economic impact of the corona crisis: What can we learn from past pandemics?
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ARTICLE TYPE
Research
TOPIC
Solutions
PUBLISHED
März 30,2020
READ TIME
6 mins
AUTHOR
David van Bragt
SHARE
Back
ARTICLE TYPE Research
TOPIC Solutions
PUBLISHED März 30,2020
READ TIME 6 mins read
AUTHOR David van Bragt
SHARE

The outbreak of the coronavirus has now turned into a worldwide pandemic. In this article, we take a step back to see what we can learn from previous pandemics. We identify some factors that are important from an economic point of view: the impact on the workforce, the need for lockdowns and the level of healthcare.

Some major pandemics in the past, like the Spanish Flu, hit economic development from all angles. This is not to be expected for the corona pandemic since the working age population is less affected than the elderly and modern healthcare is in full force. However, long periods of economic shutdowns, which may be needed if a vaccine or other treatment is not found soon, can still cause a lot of damage. We are, however, better prepared than our ancestors through modern facilities like the ability to work and shop from home. The final economic damage will nevertheless depend on the availability of accurate information (via widespread testing and global communication) and the effectiveness of ongoing support actions by our governments and central banks.

A brief history of pandemics

Although pandemic outbreaks are rare, they can have a massive impact. Table 1 below gives an overview of some major outbreaks in known human history.

Overview-of-pandemics.jpg

Source: World Economic Forum. The death toll for the ongoing corona pandemic is based on data from Johns Hopkins University, as of March 30, 2020.

 

Prior to the 19th century, pandemics were typically caused by the plague (the Yersinia pestis bacteria) and the smallpox virus. Since improvements in hygiene standards and the development of antibiotics and mass vaccination, outbreaks have mainly occurred when viruses circulating within animal species crossed the species barrier and became transmissible between humans (e.g. HIV/AIDS, Swine Flu, SARS, Ebola and now Corona).

 

Qualitative comparison of the economic impact of different pandemics

In this article, we focus on the global economic impact of three major pandemics: the Black Death in the Middle Ages, the Spanish Flu at the end of World War I (WW1) and the ongoing HIV/AIDS pandemic. Other recent outbreaks, such as Ebola, SARS, MERS and the Swine Flu, also had a significant impact on people's health and economies, but on a much smaller scale.

We find that it is useful to look at pandemics from the following points of view:

  • The impact of the disease on the available workforce
  • Whether economic lockdowns are needed to contain the disease
  • The state of the healthcare system

The Black Death pandemic hit humanity on all fronts: a large part of the workforce was killed, economic activities were largely frozen to avoid further spreading and healthcare was not able to provide adequate treatment for patients. Surprisingly, economic conditions improved afterwards as workers were able to achieve better wages and conditions due to the scarceness of labour.

The Spanish Flu shares some of these grim characteristics: this virus hit people of working age hardest and economic lockdowns were needed to slow the spread of the virus. Healthcare was of course of a much higher standard than in the Middle Ages, but had already been stretched to the limit after WW1 and understanding of viruses and how they were spread was still relatively poor.

The HIV/AIDS pandemic also hit those of working age hard, especially the homosexual community worldwide and young adults in sub-Saharan Africa. But in general, economic activities could continue in the developed world. Healthcare also reduced the impact by preventing further spread of the disease through improved treatment and education.

The current corona crisis

The current corona crisis is still in full force, so it is not possible to make definite statements here. The economic Achilles' heel seems to be the damage done by prolonged lockdowns. What we do know however is that urgently implemented and enforced isolation policies, coupled with extensive testing, are effective at halting the spread of the coronavirus, as demonstrated by several countries in the Far East. Some of these countries, such as China, have even started to relax restrictions and economic activity is returning to normal. The main question for these countries is whether the virus will return in later waves, meaning further lockdowns will be required. We expect however that they will be better prepared for any further outbreaks.

It is concerning that European and North American countries, large contributors to the world economy, were slow to react to a risk that was clearly approaching, only instigating lockdowns when the pressure was clearly building. This is partly due to cultural issues surrounding personal freedom but potentially also wariness of the economic pain these lockdowns can cause in the short term, even though the economy may be better off as a result in the longer term.

Apart from that, we think that the impact on the workforce may be moderate. Whilst younger workers can be critically affected, based upon the data to date there is a much higher risk for the elderly and those with underlying health issues. This is therefore a different characteristic compared to, for example, the Spanish Flu. High quality modern healthcare is also available in most developed countries, assuming the numbers of patients does not surge, as we have seen in Italy.

This leads us to the following, qualitative, assessment of the current corona pandemic in Table 2.

Comparison-of-different-pandemics.jpg

Source: Aegon Asset Management. We here only consider the impact on developed countries for the HIV/AIDS and corona pandemics.

 

Conclusions

Each pandemic is different and has its own impact on health, society and economics. Arguably, the biggest economic shock occurs when a disease hits the working age population hard and sufficiently high quality healthcare is not available or overloaded. The Black Death and the Spanish Flu are the most telling examples in this respect. The Black Death for example saw up to 50% of the working population dying, completely transforming the economy afterwards.

 

The coronavirus seems to cause less severe symptoms for the young and middle aged. All other things being equal, we would therefore expect a smaller long-term impact of the corona pandemic, since there is probably less effect on the working age population. Modern healthcare is also in full force to provide adequate treatment. However, long periods of economic shutdowns, which may be needed if a vaccine or other treatment is not found soon, will have a damaging effect on the economy.

 

We are, however, better prepared than our ancestors through modern facilities like the ability to work and shop from home. The final economic damage will also depend on the availability of accurate information (via widespread testing and global communication) and the effectiveness of ongoing support actions by our governments and central banks.

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More about the authors

David van Bragt Senior Investment Solutions Consultant

David van Bragt, PhD, is a consultant investment solutions in the fixed income, LDI and investment solutions team.

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