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BIS Bulletin No 7: Macroeconomic Effects of Covid-19 – An Early Review

Core Content

This BIS Bulletin provides an early review of the macroeconomic effects of the Covid-19 pandemic, drawing on empirical studies of past epidemics and recent quantitative estimates of the pandemic's impact on global growth. The report highlights the unique characteristics of the current crisis compared to previous outbreaks and outlines key transmission channels of economic impact.

Key Takeaways

• Past Epidemics' Effects: Historical pandemics have had significant economic impacts, primarily through loss of life and reduced labor supply, with effects persisting over multiple years.
• Covid-19's Unique Characteristics: The global scale of the pandemic, synchronized containment measures, and the unprecedented speed of its spread have led to severe and widespread economic disruption.
• Estimated Economic Impact: The current estimated global GDP loss for 2020 is around -4%, with substantial downside risks if containment policies are prolonged.
• Supply and Demand Effects: Both supply (e.g., labor shortages, productivity loss) and demand (e.g., reduced consumer spending, business closures) channels contribute to economic costs.
• Long-Term Consequences: The pandemic could have lasting effects on the economy, including reduced labor productivity, skill loss among workers, and disrupted supply chains.

Main Points

Lessons from Past Epidemics

• Economic Losses: The 1918 influenza is considered the most costly epidemic in modern history, with studies estimating GDP losses of 6–8% and consumption losses of 8%.
• Mortality and Workforce Reduction: Mortality has been a major factor in economic decline, reducing the labor force and increasing the capital-to-labor ratio.
• Supply and Demand Channels: Studies show that both supply-side (e.g., reduced labor supply and productivity) and demand-side (e.g., reduced consumer spending and business activity) effects contribute to economic costs.
• Financial Amplification: While not a major factor in past epidemics, financial market turbulence can amplify economic shocks, especially in the context of globalization and high corporate and household leverage.

Short-Term Economic Impact of Covid-19

• Global Sudden Stop: The synchronized global lockdowns introduced in March 2020 led to a sharp decline in economic activity, with some estimates suggesting a 20–25% monthly GDP loss.
• Unprecedented Scale: The economic impact of the pandemic is estimated to be an order of magnitude greater than previous epidemics, with global GDP loss expected to be around 6–8% for 2020.
• Sectoral Disruptions: The services sector, which dominates GDP in advanced economies, is particularly vulnerable to containment measures. Supply chain disruptions and reduced demand also play a significant role.
• Regional Variations: China's GDP is expected to contract by over 40% in the first quarter, while the US and EU face severe quarterly contractions. Recovery timelines are uncertain.

Long-Term Economic Damages

• Persistent Scars: Prolonged economic shutdowns may lead to long-term structural damage, including loss of skills, reduced labor productivity, and disrupted business relationships.
• Investment and Savings: Pandemics may lead to a prolonged period of low natural interest rates due to increased precautionary savings and reduced investment opportunities.
• Capital Accumulation: A one-time reduction in the labor force can lead to a long-term slowdown in capital accumulation and GDP growth.

Conclusion

The economic costs of the Covid-19 pandemic are unprecedented due to its global scale, synchronized containment measures, and the interaction between health policies and economic decisions. While the immediate effects are severe, the long-term consequences remain uncertain. A better understanding of the transmission channels and policy trade-offs is essential for effective economic management.

References

• Arnold et al. (2006): "A potential influenza pandemic: possible macroeconomic effects and policy issues"
• Barro et al. (2020): "The coronavirus and the Great Influenza Pandemic"
• Brainerd and Siegler (2003): "The economic effects of the 1918 influenza epidemic"
• Burns et al. (2006): "Evaluating the economic consequences of avian influenza"
• Correia et al. (2020): "Pandemics depress the economy, public health interventions do not"
• Fan et al. (2016): "The inclusive cost of pandemic influenza risk"
• Global Preparedness Monitoring Board (2019): "A world at risk"
• Jordà et al. (2020): "Longer-run economic consequences of pandemics"
• Keogh-Brown et al. (2010): "The macroeconomic impact of pandemic influenza"
• McKibbin and Fernando (2020): "The global macroeconomic impacts of Covid-19: seven scenarios"
• OECD (2020): "Evaluating the initial impact of Covid containment measures on activity"
• UNCTAD (2020): "Global trade impact of the coronavirus (Covid-19) epidemic"
• World Bank (2014): "The economic impact of the 2014 Ebola epidemic"

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