Lessons for Covid-19 from previous pandemics
Studies on previous pandemic episodes find large and persistent effects on the real economy, meaning GDP, consumption and real rates of return.
The Spanish flu implied high death rates for 18-44 year old adults, while Covid-19 has high death rates for people aged 65+. The share of GDP due to services has also increased substantially with respect to the share of manufacturing since then. Moreover, the world today is more interconnected in terms of financial markets and supply chains than in the past. Keeping these caveats in mind, there are some lessons we can draw.
Correia, Luck and Verner (2020) find that the economic consequences of a pandemic are large in magnitude and persistent. They find no evidence of policy trade-off between reducing disease transmission and economy activity through non-pharmaceutical interventions because these policies decrease mortality. Link to paper.
Barro, Ursua & Weng (NBER WP, 2020) use data for 48 countries at annual frequency from the Spanish flu for 1918-1920 and find that, after controlling for the effect of World War I, the flu generated declines for GDP and consumption in the typical country of 6 and 8 percent, respectively. There is also some evidence that higher flu death rates decreased realized real returns on stocks and, especially, on short-term government bills. Link to paper.
Jordà, Singh & Taylor (NBER WP, 2020) use data on 15 major pandemics (and wars) since 1300s for UK, France, Germany, Italy, the Netherlands and Spain. The find that pandemics depress real rates of return for almost 40 years, while the opposite happens for wars, due to the loss of capital in the latter. Link to paper.
Paola Di Casola*
Posted by Maria Perrotta Berlin
*The opinions expressed in this post are the sole responsibility of the author and should not be interpreted as reflecting the views of Sveriges Riksbank.