Spanish flu victims at a barracks hospital on the campus of Colorado Agricultural College, Fort Collins, Colorado, in 1918. Even the Spanish flu, which killed an estimated 100 million people, did not cause a prolonged downturn. Photo: Getty Images

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.

On one hand, the stock market has rebounded marvellously since the pandemic sell-off last March, realising a sharp V-shaped recovery to 2019 levels of activity. To the extent that the capital markets indicate how confident investors are about the future, this seems to suggest that the economy should follow the same trajectory.
On the other hand, economists point to the still-high unemployment rates and waning job growth as evidence that there is still a long way to go. As some top business magazines have put it, there is a “dangerous gap” between the financial markets and the real economy.

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.

These include the well-known cases of the Black Death and the Spanish flu, which killed an estimated 75 million and 100 million people respectively.


Worldwide coronavirus death toll nears 2 million

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.

What history can teach us about the coronavirus pandemic

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.

The historical pandemics that we studied do not capture the full impact that central banks and an expansive monetary policy have in stabilising the economy. New monetary policy tools have been developed over the past four decades, during which there have been no pandemics that can be classified as most severe.

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