Predictions regarding the economic fallout from the coronavirus pandemic vary, but most believe the resulting recession will be the biggest seen in a very long time. New research from the University of California, Davis, also suggests that it will be a recession whose impact lasts for decades.
The research explored the financial effects of all pandemics experienced since the 14th century, with dire predictions regarding the long-term impact.
“If the trends play out similarly in the wake of COVID-19—adjusted to the scale of this pandemic—the global economic trajectory will be very different than was expected only a few weeks ago,” the authors say. “Pandemics are followed by sustained periods—over multiple decades—of depressed investment opportunities.”
Depressed rate of return
The researchers believe that the coronavirus pandemic is likely to depress real rates of return, which is likely to result in small increases in both real wages and investment.
The findings emerged after studying the macroeconomic responses to all previous pandemic events, with economic performance studied at city, regional, and national level from the 14th century to the present day.
In total, 12 major pandemics were studied, with each resulting in over 100,000 deaths. They also examined armed conflicts that also resulted in similar fatality levels.
“Significant macroeconomic after-effects of the pandemics persist for about 40 years, with real rates of return substantially depressed. In contrast, we find that wars have no such effect, indeed the opposite,” the researchers say.
Investment opportunities
The researchers explain that pandemics are nearly always followed by reduced investment opportunities, with people often preferring to save their money instead, both to develop a precautionary nest egg, and to replenish depleted wealth.
They also suggest that the natural rate of interest starts a downward trend that lasts about 20 years, with it only returning to a ‘normal’ level about forty years after the pandemic. Suffice to say, interest rates around the world have been incredibly low already after the financial crash of 2008, so it’s not quite clear how much lower they can possibly go.
One point the researchers are at pains to point out is that all past pandemics occurred at times when people generally didn’t survive until old age anyway, so that must be taken into account when comparing the impact then to now.
“The Black Death and other plagues hit populations with the great mass of the age pyramid below 60, so this time may be different,” they remind us.
It was also a period when relatively few people could work from home, much less perform the majority of their work from home, so the economic impact may have been greater (even assuming that governments took the same sort of measures to lock down economies, which has to be disputed).
