Pandemics and the economy

Who knows quite what will happen with the current coronavirus.  But experts in such matters seem pretty confident (resigned?) that one day there will be virus that really takes hold and causes significant infection, disruption, and probably loss of life across a wide range of countries.  The 1918 flu outbreak is the (relatively) modern best known case –  estimated to have infected 500 million people worldwide and killed anything up to 50 million people.  In New Zealand, with a population then of little more than a million, almost 9000 people died.    Rather milder flu outbreaks in 1957 and 1968 also feature in the literature, and the memories of older people.

I got interested in pandemics when there was a major ongoing whole-of-government focus on the risk last decade.  I was the Reserve Bank’s representative on various fora, including specific multi-agency working groups focused on economic issues and risks, and led our own consultations with banks (where the head of risk of one major bank memorably assured me, when we pursued the issue, that wholesale funding markets just could not dry up –  this just a year or two before they did in 2008).

The prime focus in much discussion around pandemics is (understandably) on the potential loss of life, but in a modern economy a serious pandemic could have major economic consequences, less because of the loss of life itself (although the loss of 1 per cent of the population would, all else equal, lower potential GDP semi-permanently by around 1 per cent) than because of the disruption, the fear, and the voluntary or semi-compulsory social distancing that would be put in place to try to minimise the risk of the virus spreading or of particular individuals contracting it.  In a quarter in which an outbreak was concentrated, it is quite conceivable that GDP could fall by as much as 20 per cent  (if every worker was off work for just a week –  whether sick themselves or caring for others –  and that was the only adverse effect –  it wouldn’t be –  that alone would be a loss of almost 8 per cent).   Even if the outbreak was quite concentrated in time and normal economic activity resumed in full very quickly, in such a scenario GDP in the year of the outbreak would be 5 per cent less than otherwise.

What are the sorts of disruptions I have in mind, in the event of a major pandemic (although events like 1957 were also estimated to have non-trivial economic effects)?

  • think of schools being closed to reduce risk of infection spreading, and the associated time off parents would have to take to care for even well children,
  • let alone the losses of production as successive waves of individuals (children, parents, aged parents or whoever) got sick and needed to be nursed,
  • and even if cafes, movie theatres etc remained open –  and they might be closed, either voluntarily and pre-emptively, or compulsorily – people would become reluctant to go out more than strictly necessary,
  • and if the borders weren’t closed, how many people are likely to be keen on holidaying in a New Zealand experiencing serious pandemic flu outbreaks.  Fewer New Zealanders will be interested/able to travel abroad either,
  • plenty of deliveries just won’t get made (drivers sick, production staff sick, and so on).   And perhaps the single most sobering statistic I heard in the various economic working group discussions was that big supermarkets typically hold stock equal to only about 48 hours or so of sales.   You could expect people to stock up early, and then for deliveries/sales to be patchy at best –  a real reluctance to venture into crowded places more than strictly necessary.   Unlike 1918, few people now vegetable gardens.  Unlike 1918, many businesses (including those supermarkets) now rely on just-in-time deliveries, and things working smoothly, which they are unlikely to in the presence of potentially deadly virus spreading among a lot of the population.
  • the housing market would seize up (not many would be keen on open homes, and a potential loss of population would lead to uncertain downward revisions in expected future prices),
  • and in all this a lot of people are losing their jobs (eg staff in tourism or entertainment sectors), further reinforcing the downturn in demand,
  • and also raises issues around income support (could MSD cope?) and ability of borrowers (commercial and residential mortgage) to service their debts,
  • assume this hypothetical event is pretty global in nature and one can also assume that financial markets will be adversely affected (bankers get sick too, but uncertainty and risk aversion, with tightening credit standards, would be the much bigger issue).  Investment decisions would be postponed, including because no one would know what the post-pandemic world might look like (the difference between say a 0.5 per cent and a 1.5 per cent population loss would make quite a difference to infrastructure needs over the following decade.

And in all that I haven’t even talked about potential disruption to parts of global trade that aren’t mainly about the movement of people.  But will the cows all be milked, the milk collected, foreign consumers be looking to buy as much, and so on?  Global supply chains (often crossing multiple border) for products that we import are also likely to be disrupted.

Many of these effects would wash through quite quickly on some scenarios: the outbreak comes quickly, strikes hard, and passes almost equally quickly.  But presumably there are other scenarios, in which some countries are initially affected much more severely than others, and so some countries look on for time in anxiety and unease –  bearing many of the costs of precautions/fear, even before much of the illness has struck.  Or perhaps there are resurgent waves over several quarters.  In those sorts of scenarios, the accumulated economic costs (and social dislocations) could mount rapidly.

In the years since I was involved in thinking about these issues in the public sector, some things have changed.  For example, remote working is more feasible, generally accepted, and widespread than it was in 2006/07.  More business can go even if people aren’t able to work in central city office space, in close proximity to lots of other people.   But people caring for a seriously ill or dying family member, or caring for little kids not able to be in daycare won’t be producing much (GDP).    And much of the reduction in economic activity will the result of a reluctance to go out, disruptions to tourism, perhaps closure of public places.  Netflix should do well –  and I guess Uber Eats, if restaurants have staff and there are drivers willing to deliver –  but the scale of the potential disruption, and losses that can’t be recouped, would still be huge.

To repeat, all this is a discussion of a hypothetical extreme scenario, but the sort of event highly likely to face us one day, and the sort of scenario officials took very seriously in thinking about risks and options last decade.  For anyone interested in some of the economic issues in a New Zealand context, there is a 2006 Treasury working paper here, and some advice to the Minister of Finance in 2009 at a time when there were fresh worries about emerging risks.   Other papers we wrote at the time, with contingency planning thoughts, don’t seem to have been released.  Here is a 2009 UK academic paper with some similar-sized estimates to those NZ officials were using, and here is a 2013 Reuters story looking at some related issues.  Pandemic risks were a big issue in the mid-late 00s, but I can’t see much more recent that has been written on the economic issues.

Finally, three points:

  • it isn’t easy to see huge macro effects in 1918, but that is probably because of a combination of three things; the end of the war, the paucity of high-frequency data, and a less highly-interconnected economy,
  • the standard assumption in planning in the 00s was that interest rates could be cut as much as was helpful, to at least buffer some of the adverse economic effects (not prevent most of them).  That mostly isn’t an option now for advanced countries including New Zealand, where the OCR (or equivalent) is already very low or (in some places) even negative,
  • and, the single most sobering line I heard in all the discussions in the 00s came from Geoffrey Rice the historian who wrote the book on the New Zealand experience in 1918.  In a public lecture he noted in 1918 much food had been distributed to sick families or individuals by groups like the Boy Scouts.  How many middle class parents now, he asked, would be willing to have their children delivering food to potentially highly infectious households at the height of a disease outbreak (when all public services will be stretched very thin).   It is a question I’ve never forgotten.  The institutions of civil society aren’t mostly what they used to be.