The uncertain economic costs of the coronavirus

The economic impact of the coronavirus pandemic worldwide will depend on its incidence and duration, something we don't know at present. Looking back, it is estimated that influenza A in 2009-2010 caused between 150 000 and 575 000 victims, with a mortality rate of 0.03% (deaths/infected). And the 1957 Asian flu caused between 1 and 4 million deaths, with a mortality rate of around 0.2%.

The Spanish flu of 1918-1920 took between 17 and 100 million lives, according to several estimates, and the mortality rate is estimated to be at least 2%, one of the highest in history.

The incidence of COVID-19 is still unknown. It can be argued that the figures underestimate the true number of people infected. And the death toll may also be underestimated. Consequently, we don't know the true magnitude of the problem.

Cases are known in almost all countries, although the incidence is and will be very unequal in different areas of the planet. If the prevalence of the pandemic is a determining factor in its economic impact, its duration is no less so. The Spanish flu had three phases covering a period of three years.

The duration of the current crisis will probably be shorter than in the case of the Spanish flu, during which the confinements that are now taking place didn't happen. In fact, at the end of the First World War, the countries involved censored the information about the real incidence of that crisis.

The economic costs of the pandemic can be divided into three groups:

1. Medical costs

The medical and pharmaceutical costs, including fitting out new infrastructure, hiring additional medical staff, etc., will certainly be high, but will be the lowest of the three costs.

2. Costs of confinement

The costs of confinement are those resulting from the cessation of full or partial production in many sectors and the fall in consumption of many goods and services.

There have been no similar confinements in history that we can compare to evaluate the cost of the current confinement. The impact on production, trade and consumption can be very large.

Let us consider the following quick calculation: suppose that the confinement lasts two months and that during that period the production of final goods and services falls by 30%.

Given these assumptions, which don't seem to be too pessimistic, annual GDP would fall by 5 %. Someone might think that a 5% drop is not much. To give you an idea, in 2009, the year of the greatest fall in GDP during the last world financial crisis, income fell by 3.6%. In addition, a longer period of confinement may be necessary. In that case, the fall in production could also be considerably larger than the 30% in the previous example.

Two months of confinement may be enough. At least it looks that way based on the Chinese experience. However, restrictions on the movement of people around the world are likely to remain in place for considerably longer, for fear of importing cases from countries that will experience the same process with some delay from us, which will have a very negative effect on important sectors such as tourism or passenger transport.

The costs associated with the fall in production will have a greater or lesser economic impact on families and businesses depending on how governments and central banks act. Governments are implementing support packages for businesses and households that will partially offset the negative economic impact of the pandemic. These packages are of a very significant magnitude, which will require an increase in public debt. This means a relaxation of the budgetary restrictions to which states are subjected.

Fortunately, the interest rates on debt are currently low, which makes the financing of the debt to be issued more financially sustainable. However, debt levels are in many cases higher than before the last financial crisis, leaving less scope for indebtedness.

The central banks, for their part, have expressed their willingness to acquire debt from the affected countries, injecting liquidity into the system. Proposals in this sense include the purchase of debt by central banks and debt forgiveness, a controversial measure that should not be used except in cases of extreme need, and this could be one as Jordi Galí suggests. These fiscal and monetary measures will help to cushion the economic blow of the pandemic.

These are the costs of the pandemic that we can expect in the short term. And in the long term? We have already commented that for some sectors such as tourism and passenger transport it is more than likely that restrictions will be maintained even after confinement, but the effect on expectations goes beyond these effects.

3. Impact on expectations

The impact on future expectations seems to be the biggest potential problem. At one end of the range of possible scenarios we would have the case where the pandemic only has a transitory economic effect, i.e., once the confinement is over we return to a "business as usual" situation, and the economy takes up the pulse again, as if nothing had happened.

At the other extreme, once the worst of the pandemic is over, uncertainty about the future would remain, people wouldn't return to pre-health crisis consumption levels, and we would enter an economic recession that would drag on for a long time. There is a lot of difference between the two scenarios.

The duration of the pandemic will be a determining factor in the evolution of expectations. If there is a second wave of the pandemic, or its incidence spreads over the winter in the other hemisphere, uncertainty about the future could cause the economic recession to be perpetuated.

The uncertainty in which we find ourselves is manifested, for example, in the compulsive buying of food in supermarkets. Another manifestation of that uncertainty is the sale of shares by speculators on the stock market. With the prospect of calm, we can expect food in the supermarket to be restocked and the prices of those quoted to rise, as it is hard to believe that their real value could have fallen by as much as 30%, as happened to the Ibex in the last month, which has just closed the worst quarter in its history.

Another determining factor in evaluating the costs of the current crisis is the unequal impact among countries, biased towards those with greater economic weight. As a result of this, the economic impact of the crisis will be higher than if the pandemic had affected countries with less economic weight more.

Fortunately, the most affected countries have better health systems and their governments are more and better able to deal with the crisis. Let us hope that the poorest and least resourced countries don't suffer the crisis in the same way.

Javier Gardeazabal is Professor of Economic Analysis, University in the Basque Country / Euskal Herriko Unibertsitatea. He doesn't receive a salary, nor does he do consulting work, nor does he own shares, nor does he receive funding from any company or organization that could benefit from this article, and he has stated that he has no relevant links beyond the academic position cited