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Economic lessons from previous pandemics

What can the economic impact of Spanish Flu, Asian Flu and Hong Kong Flu tell us about the economic consequences of Covid-19?

Covid-19 and Influenza (the flu) are both infectious respiratory diseases, and have similar symptoms, but they are caused by different viruses. Consequently, drawing epidemiological and economic inferences from the Spanish Flu (1918-19), Asian Flu (1957-58), or Hong Kong Flu (1968-69) pandemics are not without difficulty. 

The sheer scale of the Spanish Flu pandemic makes it relevant to understanding Covid-19 now, but it’s a frustrating comparison, as we’re hampered by poor data and a dearth of studies on this period. Even big pandemics have received minimal attention from economists. This author looked back at his old university economic history course notes on the post-World War 1 and early 1920s period and found no references at all to Spanish Flu. It’s not altogether clear whether or not this was the fault of the teacher or the student.

The conventional wisdom is that the US economy contracted sharply over the 1919-20 period. However, revised estimates of historical GDP over this period in the US suggest the downturn was far less, and therefore compatible with a V shaped recovery[1]. One literature review of the impact of the Spanish Flu on the US economy found little effect[2].

In the UK the economy boomed over the 1918-20 period. Comparisons are however confounded by the difficulty in separating out the effects of Spanish Flu from demobilisation at the end of World War 1. Unlike the US, the UK had an immediate post-war boom, but then experienced a GDP downturn in the early 1920s which was worse than in the depression of the 1930s. The US in contrast began the ‘Roaring Twenties’ GDP growth acceleration from 1922 onwards.

The Asian and Hong Kong flu outbreaks were of a much smaller magnitude than the Spanish Flu or Covid-19 in terms of their economic impact. A cursory glance at the historic quarterly UK GDP series, for the period of the Asian and Hong Kong Flu pandemics shows mere blips with a complete bounce back in the next quarter. Again, however, there is some uncertainty as to the actual economic impact of a pandemic, because of the contrasting performance of the UK and US economies. At the time of the Asian Flu, whilst the UK economy was enjoying Harold Macmillan’s “you’ve never had it so good” over the 1957-58 period, the US experienced ‘Eisenhower’s Recession’ with a sharp decline lasting 8 months. Whilst the downturn in the US was much greater than in the UK, the economy soon recovered.

We've researched 3 different types of study:

  • Economic studies of previous pandemics.
  • Economic model simulations of pandemics with/without containment measures.
  • Covid-19 scenarios from official bodies such as the BoE, OBR, OECD and IMF.

What we can derive from these studies is that:

(1) The economic consequences will differ in each pandemic, we can only draw tentative comparisons with previous pandemics.

(2) Previous studies tend to assume far higher death rates but still produce far lower output losses relatively speaking from pandemics, compared to Covid-19.

(3) The modelling of pandemics generally predicts that they will only have temporary effects, with GDP growth accelerating sharply in the quarters after the outbreak

(4) Model simulations show increasingly negative impacts as more lockdown and social distancing are incorporated.

(5) The most recent estimates of the economic impact of Covid-19 are of an order of magnitude greater than most previous estimates.

(6) This time is different in other ways as well, in terms of the initial conditions going into the crisis due to: (a) The size of public and private debt. (b) The scale of monetary and fiscal policy response.