While pandemics are comparatively rare, and severe ones rarer still, I am not aware of a historical episode that can provide any insight as to the likely economic consequences of the unfolding global novel coronavirus crisis. This time truly is different.
A key feature of this episode that makes it unique is the policy response. Governments around the world are giving priority to measures that limit the spread of disease and save lives, including the complete lockdown of a region and even of entire countries (Italy, Spain and France, for example). A much longer list of countries, including the United States, have imposed strict international travel bans and prohibited all manner of public events.
These measures could not be further from the policy response to the deadliest viral outbreak of modern times, the 1918-19 Spanish influenza pandemic (see first chart).
That pandemic, which claimed 675,000 lives in the US and at least 50 million worldwide, occurred against the backdrop of World War I. This fact alone precludes drawing any meaningful comparisons regarding the effects of the COVID-19 pandemic per se on the US or global economy.
In 1918, the year in which influenza deaths peaked in the US, business failures were at less than half their pre-war level, and they were lower still in 1919 (see second chart).
With COVID-19, by contrast, the vast uncertainty surrounding the possible spread of disease and the duration of the near-economic standstill required to combat the virus make forecasting little different from guessing.
But, given the scale and scope of the coronavirus shock, which is simultaneously cratering aggregate demand and disrupting supply, the initial effects on the real economy are likely to surpass those of the 2007-09 global financial crisis (GFC).
While the coronavirus crisis did not start as a financial crisis, it may well morph into one of systemic severity. At least until reduced economic activity results in job losses, US household balance sheets do not appear problematic, as they were in the run-up to the GFC. Banks, moreover, are much more strongly capitalized than they were in 2008.
Corporate balance sheets, however, look far less healthy.
As if the coronavirus shock were not enough, the oil war has nearly halved oil prices, adding to the predicament of the US energy sector. With much of manufacturing hit by supply-chain disruptions, and broad segments of the service sector more or less paralyzed, corporate defaults and bankruptcies among small and medium-size businesses are set to spike, despite fiscal and monetary stimulus.
While the financial and debt crisis of the 1980s affected emerging markets, the GFC was a financial crisis (and in some cases also a debt crisis) in advanced economies.
Other things being equal, the US Federal Reserve’s recent significant interest-rate cut and other measures in response to the pandemic should ease global financial conditions for emerging markets, too. But other things are far from equal.
For starters, the classic flight to US Treasuries in times of global stress and the surge in the VIX volatility index reveal a sharp increase in risk aversion among investors. These developments usually coexist with sharply widening interest-risk spreads and abrupt reversals of financial flows as capital exits emerging markets.
Not since the 1930s have advanced and emerging economies experienced the combination of a breakdown in global trade, depressed global commodity prices, and a synchronous economic downturn.
True, the origins of the current shock are vastly different, as is the policy response. But the lockdown and distancing policies that are saving lives also carry an enormous economic cost. Clearly, this is a “whatever-it-takes” moment for large-scale, outside-the-box fiscal and monetary policies.
Carmen M. Reinhart is a professor of international financial system at Harvard University’s Kennedy School of Government. Copyright: Project Syndicate, 2020. www.project-syndicate.org