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.


15 thoughts on “Pandemics and the economy

  1. Nice commentary Michael.

    One point I would make. The mortality rates being reported by the likes of CNN are incorrect.

    They are measuring mortality simply by dividing the total deaths by the number infected. This is fine once the pandemic is over but inaccurate at the commencement as it’s a geometric process. Strictly speaking one must take out those infected from the calculation and calculate it as: mortality rate = deaths/(deaths + recovered).

    As CNN has been reporting mortality at 3% using the incorrect calculation methodology, one can assume its significantly higher. But without the accurate figures on whose had it and recovered its impossible to calculate.

    I think government in China has every reason to be concerned. The mortality rate looks similar to the flu pandemics you’ve discussed from the past.

    Liked by 1 person

  2. Looking beyond the short term impact, I recall reading that the Black Death plagues in the 1300s were positive for the European economies, increasing peasant wages, and helping to move things on from stagnant feudalism to the more advanced economies seen later. This was is what led to modern english developing – before the plague the Norman overlords never had much need to interact with the conquered Anglo-Saxons. Cutting the workforce and manager class by 50% forced them to speak with each other, leading to old English mixing with French.

    Maybe Coronavirus is the productivity boost for New Zealand you have been waiting for?

    Liked by 1 person

      • Looking at the figures in your first paragraph in 1918 the flu killed one in ten infected worldwide but one in a hundred in NZ. I can think of many reasons but maybe the most significant being the comparative high standard of basic health for New Zealanders a century ago. During the Black Death it was said that if you were a peasant and caught the plague you died but if you were an aristocrat you had a chance of survival.
        I remember reading that the 1918 flu selectively killed young adults and left the ederly untouched. A similar selectivity by age or sex would be less significant today since most modern jobs can be done by the elderly females.
        A primitive society has more resilence to epidemics. Quote from a history of the Mekeo (my wife’s tribe) “”Probably 80 to 90 percent of the population died from epidemic diseases during the first fifty years of contact.”” – that would be about 1850 to 1900. During the immediate period after Russia ditching its communist economy the people of Moscow were fed by a range of produce from local farms; it was noted that if the communists had been able to develop a ‘modern’ efficient agriculture then Moscovites would have starved.

        Thank you for reminding us that an economy should be not just efficient but also robust/resilient. “” wholesale funding markets just could not dry up “” – we trust our experts; like most of the population I have little concept of what ‘wholesale funding’ is and cannot be bothered finding out – until the ATM stops issuing banknotes that can be traded for food.


      • The death rate here was just under 1% of the population, but not everyone got the infection. Death rates in poorer places were often 5% or more of the population. One thing that was interesting about the 1918 experience was that more prime age otherwise-heatlhy people died than would usuaally have been expected (as with early reports of this coronavirus, death is often concentrated in the v old or v young or those underlying health problems).

        re wholesale funding, the issue was that our banks borrowed heavily in international markets, often for very short terms, and so had to rollover that funding quite often. these days, banks have a larger proportion of ordinary deposit funding and the foreign wholesale funding they do have is usually for longer terms.


    • 😆 😆

      Perhaps but I doubt it.
      Since those times there have been a lot of new products for use.

      It’s kind of my business in some ways. For example with the right equipment freely available we can treat the air in a property with the likes of hydroxyls or ozone and a few other smart products. That will kill all bacteria and viruses. It’s not a new idea but is really only in its infancy in its use. Hydroxyl, for example is totally safe to use with people and animals around.

      These products are used every day in NZ.

      These diseases like many others, attacks those with weak immune systems. The best protection is being a healthy person and ensuring that your immune system is as well. Lots fo cheap red wine is a good anti dote.


  3. Would we actually see a population reduction over anything more than the very short term (a few months). New Zealand citizens living outside the country number well over a million (throw in kids and spouses could be nearly 2 million), the higher the death rate, the more likely they are to come home (the worse it is the less likely financial loss is to prevent one from coming back).

    A period of enforced working remotely would do great wonders for NZ business as there seems to be a reluctance to embrace the concept.


  4. Well, why worry? I’m sure the Coalition have “got” this, just like the measles epidemic. Our borders remain wide open and there is no screening – that would be racist and also jeopardize our wonderful international education sector and the tourism trade. Back to sleep everyone: stock up on lemsip if you must.

    Liked by 1 person

    • Discussion was stopped on the Tour guides and Drivers site by a protective Admin. Jacinda has 19 full time employees looking over peoples shoulders also in case there is an outbreak of opinion.

      Liked by 1 person

      • Stuff just now reports the government has finally been shamed into starting screening of flights from tomorrow, but only on a voluntary basis if a passenger feels unwell. The incompetence is chilling.


  5. One thing that was interesting about the 1918 experience was that more prime age otherwise-heatlhy people died than would usuaally have been expected (as with early reports of this coronavirus, death is often concentrated in the v old or v young or those underlying health problems).

    The reason for the increased death rate among younger population was stronger immune system’s response to the disease in this age group, resulting ironically in weakening of the said system and ultimately in the increased mortality.


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