March 26, 2020

Expect effects to be massive in ways that differ from other disasters

Public health officials are telling Americans to avoid face-to-face contact, including the commute to—and working in—one’s job location, in the hopes of subduing the coronavirus outbreak. As necessary as those steps might be from a medical standpoint, there’s a flipside to huddling up and avoiding the outside world for the foreseeable future: Large swaths of the economy are grinding to a halt. And because this is a global pandemic, the same thing is happening virtually all over the world.

Indeed, the more the SARS-CoV-2 virus spreads around the globe—there are more than 300,000 cases of the related COVID-19 disease, as of this writing—the greater the concern over not just our health, but our livelihoods.

Just how big an impact can a pandemic like COVID-19 have on the global economy? Researchers suggest that it will likely be significant, especially if the virus is not contained quickly.


While the economic impact of a pandemic may not be long-lasting if the underlying cause is contained quickly, it can be powerful enough to shutter some businesses and lead to sharp spikes in unemployment.

The biggest pandemic in modern history was the Spanish Flu of 1918-1919, during which many service-based businesses suffered double-digit losses.

Government interventions, such as sending money directly to households, may have less impact when stores are closed and people are fearful of even receiving packages at their door.

The advent of a pandemic is a good time for workers to shore up their emergency funds and make sure they're prepared for a possible job loss.

The Interconnected Economy

With millions of people in the United States and around the world in a virtual lockdown, a ripple effect throughout the economy is inevitable.

Certainly, specific industries bear the brunt of the damage. Shops and restaurants start to empty out, if not close their doors altogether. Non-essential travel slows down, curtailing revenue for not just airlines and cruise-ship operators, but smaller businesses that rely on tourism revenue. The list goes on.

However, those employed in seemingly unrelated industries can also feel the secondary effects of social distancing. For example, manufacturers—especially those outside the medical field—may see fewer orders as shopping slows down. Banks may have to absorb more loan defaults as a portion of its customer base loses work. And oil companies see prices plummet as investors sense weaker demand.

The fear of the unknown can only exacerbate these economic impacts. That means even individuals and families with ostensibly stable employment may start to limit purchases in case the financial aftershock isn’t able to be contained.

Measuring the Effect of a Pandemic

Every pandemic is unique, which makes predicting the repercussions of any crisis more educated guesswork than science. What’s more, there simply aren’t many recent examples that compare to the worst-case estimates of something like COVID-19. For example, the H1N1 flu of 2009 was widespread, but not as deadly; the Centers for Disease Control estimate there were 60 million cases in the U.S., resulting in fewer than 13,000 deaths.

The closest comparison in modern times occurred more than a century ago, when the so-called “Spanish Flu”—caused by a different strain of H1N1 virus—ravaged the globe from 1918 to 1919. According to CDC estimates, roughly 500 million people were taken ill with the disease, which ultimately took the lives of about 50 million worldwide.

Economic data from the early 20th century is scarce. However, an analysis by the Federal Reserve Bank of St. Louis estimated that a lot of businesses, particularly service- and entertainment-oriented ones, “suffered double-digit losses in revenue.” If there’s a silver lining, it’s that the economic disruption appears to have been short-lived, as the underlying health emergency subsided in 1919.

How does the current pandemic compare? Given the number of likely unreported cases, the true mortality rate of the virus that causes COVID-19 may not be known for some time. Based on available live data at the time of this writing, the crude mortality rate was slightly over 4%, making the reach of this pandemic a vital health concern. A group of researchers from the University of Hong Kong and Harvard wrote in the journal Nature that as many as one-quarter to one-half of the world’s population is likely to contract the virus, “absent drastic control measures or a vaccine.”

The Impact of COVID-19

While experts can estimate what the economic fallout from a pandemic such as the coronavirus will be, the precise impact will vary based on how many people are affected, how severely it hits, and which societal interventions are necessary to contain its spread.

Back in 2005, a World Bank official predicted that a global influenza pandemic, for example, could kill tens of millions of people and cause $800 billion in economic losses. The impact of the current crisis, of course, won't be clear for some time.

Financial projections for COVID-19 run the gamut. The Organization for Economic Cooperation and Development, an entity with 36 member countries, estimated earlier this month that a long-lasting and severe coronavirus pandemic that spreads throughout Asia, Europe and North America—a situation that seems more likely by the week—could cut the global growth rate to 1.5-percent in 2020. That’s roughly half the growth the world economy would otherwise achieve.

A separate analysis by the consulting firm McKinsey & Company offers a similar outlook. Its research suggests that a more severe COVID-19 pandemic, in which city and suburban residents would have to significantly change their work habits and otherwise distance themselves socially for six to eight weeks, could cut global GDP in half, to between 1% percent and 1.5%.

Increasingly, those projections look too rosy for the situation that's now unfolding. Already, roughly 1 in 3 Americans are being ordered to stay indoors, creating a huge drag on consumer demand and worker productivity. Goldman Sachs estimates that as many as 2.25 million Americans will make their initial filing for unemployment benefits this week, a roughly eight-fold increase from last week.

The chief U.S. economist for Oxford Economics, Greg Daco, told the New York Times last week that a recession is all but inevitable. He estimates that GDP will sink 0.4% in the first quarter before plunging 12% in the second quarter. Goldman Sachs offered an even more dire estimate, suggesting a second-quarter decline of 24%.

A century ago, the economic toll from the Spanish Flu was not particularly long-lasting. However, no one can say for certain whether that will be the case this time around. Certainly, the more effective governments in the U.S. and abroad are in facilitating medical care and reducing the rate of transmission, the more muted the economic impact will be.

Clearly, investors see economic turmoil as an inescapable reality right now, with the S&P 500 index falling to a 3-year low as of last week.


Last week, the investment bank Goldman Sachs predicted a staggering 24% drop in second-quarter output this year.

Can Government Intervention Help?

In an ideal scenario, legislatures and central banks would use the power of the purse to help mitigate an economic crisis. But those measures may prove less effective during a pandemic.

For example, efforts to open up the Treasury and send money directly to households might help individuals who have lost their job or seen their working hours reduced. But some experts argue that the impact is muted if many of the individuals receiving the funds can’t spend it—after all, many shops and restaurants are closed.

And interest rate cuts, intended to boost liquidity at a time when money is tight, may lose some of their potency when rates are already conspicuously low. The Fed slashed a key rate to zero last week, giving it precious little room to maneuver. “More interest-rate cuts into deep-red territory might help stock markets, but they also could trigger a run on cash,” wrote Hans-Werner Sinn, president of the Ifo Institute for Economic Research, in The Guardian this week.

Those aren't the only devices that governments have in their toolkit, however. They can, for example, activate short-term financing mechanisms that help businesses stay afloat and retain workers during the healthcare crisis. And they can bolster unemployment insurance and provide other safety nets that keep the most vulnerable residents from losing their homes or going hungry.

Most important, perhaps, government leaders can help ensure that hospitals get the vital resources they need to treat patients and protect doctors and nurses. They can also work with the private sector to ensure that testing is readily available, something that has to date hampered efforts to contain the coronavirus in U.S. Indeed, some experts believe the best economic medicine that the public sector can provide is a quick resolution to the underlying health threat. “Anything that slows the rate of spread of the virus is the best kind of stimulus,” Austan Goolsbee, the former chair of the Council of Economic Advisers, told NPR this month.

Preparing Yourself Financially

While pandemics can cause significant economic damage, at least in the short term, there are steps individuals can pursue to protect themselves as much as possible. Here are a few of the measures you might consider as a pandemic takes hold:

  • Don’t obsess over your 401(k). Your investment statements are going to look very ugly for a while. But when it comes to long-term investing, it’s usually better to stay the course. By selling off your holdings, you’re locking in losses, which means you won’t benefit from an eventual recovery. For those with short memories, it only took a few short years for the market to rebound from the stock market collapse of 2008.
  • Build up your emergency fund. Conventional wisdom dictates that you should have three to six months’ worth of expenses readily available in your bank account at all times. A pandemic is one of the scenarios for which they’re intended. So if you’re a little short of the mark, now’s the time to build up your reserve if you can—you never know if you might need it.
  • Dust off your résumé. With less demand, some businesses aren’t going to be able to keep their entire staff on payroll. If you work in a hard-hit industry, now might be the time to start looking at other job opportunities. Start connecting with people who might be able to aid your job search and make sure your résumé is in good shape.
  • Reach out to lenders. Those who have already seen their incomes drop as a result of a pandemic might find it hard to pay their mortgage, rent, or student loans. Since so many people are going to be affected, lenders and landlords may be more willing to accommodate you than they otherwise would. The worst thing you can do when you miss a payment is keep your creditors in the dark.

The Bottom Line

As governments around the world limit the mobility of their people, most experts agree that a significant drop in economic output is inevitable. The more successful countries are at keeping the rate of infection in check, the smaller that impact will be. In the meantime, individuals can help themselves not only by social distancing, but by analyzing their financial situation and planning for the worst.

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