What 500 years of history tells us about the long-term economic impact of pandemics
- Research shows that past pandemics had no statistically significant impact on real economic growth, inflation, interest rates, exports or wages
- The economy will probably rebound rapidly after Covid-19, given the new monetary tools available – the stock market confidence is far from misplaced
We are now a year into the Covid-19 pandemic and one question remains: when will the global economy recover from what has been called the worst pandemic in over 100 years? Central to the uncertainty surrounding this question are the two very different stories that the financial markets and the real economy have painted.
The best and perhaps only way to understand how long it will take the global economy to recover from the Covid-19 pandemic is to turn to historical precedents. So, we compiled a unique set of 500 years of combined economic data for the United States and Britain, and measured the economic and financial impact of 11 major pandemics, each of which is estimated to have caused at least 100,000 deaths.
Worldwide coronavirus death toll nears 2 million
Using the state-of-the-art local projection method developed by Professor Òscar Jordà at the University of California, Davis, we measured the impact of these historical pandemics on key economic variables, including real gross domestic product growth, inflation, real interest rates, export growth and real wage growth. Our data came from three sources: the Bank of England, the US Federal Reserve and global financial data.
What we found was quite striking: during the 10-year period following a pandemic, the response of US and British real GDP growth rates is never statistically significant. That is, after each pandemic ended, the economy rebounded rather quickly, back to the country’s long-term GDP growth trajectory.
Even if we only consider the six most severe pandemics, which each killed an estimated 1 million people at least – comparable to Covid-19, which has claimed more than 2.3 million lives globally so far – there is still no statistically significant pandemic impact on real GDP growth rates.
The results for the effect of a pandemic on inflation, real interest rates, export growth and real wage growth were highly similar. It is worth noting that, while pandemics appeared to be deflationary as demand dropped in the short term, they quickly became inflationary afterwards.
Real interest rates, on the other hand, moved in the opposite direction. Past pandemics appeared to stimulate export growth and short-term wage growth. But these effects were quite transitory and cannot be confirmed statistically.
Our results of no results may not be totally surprising. Pandemics, unlike wars, do not destroy production capacity, and while they may take away lives, the active workforce – those young and healthy – are relatively less affected. In the case of the Covid-19 pandemic, there is an additional reason to believe that the global economy will recover rapidly.
Therefore, after accounting for the important role that central banks play in today’s economic environment, we should expect the world economy to revert to pre-pandemic growth levels more swiftly following Covid-19. In a triumphant victory over the virus – and the naysayers – perhaps the market was right to rally.
Jie Gan is professor of finance and director of the Centre on Finance and Economic Growth at Cheung Kong Graduate School of Business (CKGSB). Jianping Mei is professor of finance and academic director of EMBA at CKGSB. Florence Wang is a final-year student at Princeton University studying public and international affairs