The Long Economic Hangover of Pandemics

History shows COVID-19’s economic fallout may be with us for decades

 
The COVID-19 pandemic’s toll on economic activity in recent months is only the beginning of the story. While the rapid and unprecedented collapse of production, trade, and employment may be reversed as the pandemic eases, historical data suggest that long-term economic consequences could persist for a generation or more.

Among these are a prolonged period of depressed real interest rates—akin to secular stagnation—that may linger for two decades or more. Still, one piece of good news is that these sustained periods of low borrowing costs are associated with higher real wages and create ample room for governments to finance stimulus measures to counteract economic damage caused by the pandemic.

Research on the economic fallout of the ongoing COVID-19 pandemic has so far naturally focused on the short-term impacts from mitigation and containment strategies. However, as governments engage in large-scale counter-pandemic fiscal programs, it is important to understand what the economic landscape will look like in the years and decades to come. That landscape will shape monetary and fiscal policy in ways that are not yet fully understood.

A look at previous pandemics, going back to the Black Death in the 1300s, can help fill this gap by shedding light on their medium- to long-term economic effects. In extrapolating from historical trends, though, it’s important to note one crucial distinction. Past pandemics such as the Black Death occurred at times when virtually no one survived to old age. With today’s longer life spans, perhaps this time may be different: COVID-19 mortality appears to disproportionately affect the elderly, who typically no longer participate in the labor force and tend to save more than the young.

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Πηγή: imf.org