When Will Canada Bounce Back From the Pandemic?

Predictions about the effects of the coronavirus pandemic on the world’s economy arrive almost daily. How can we make sense of them in the midst of this economic storm? After all, research shows that economic forecasts made during events such as SARS are often wildly inaccurate.

To calibrate current forecasts—such as the International Monetary Fund’s (IMF) prediction of a 6.2 per cent decline in gross domestic product (GDP) for Canada—I’ve looked at the history of similar worldwide economic shocks, studied macroeconomics models and reviewed nearly 75 studies to better understand what might happen in a post-pandemic world.

Lessons from 1918

The influenza outbreak of 1918-20 killed at least 40 million people, or approximately two per cent of the world’s population. In Canada alone, at least 50,000 deaths were attributed to the flu, approaching the number of Canadian deaths in the First World War. Solid data about GDP did not exist for that era, so economic historians have to recreate economic measurements based on the data that was collected. 

The most thorough study focuses on how the influenza pandemic 100 years ago affected Sweden. The Swedish study took advantage of the fact that the country kept very detailed data on causes of death, as well as having a history of accurate economic record-keeping dating back to the 1800s.

Sweden was a neutral country in the First World War, so unlike other Western nations, the war had limited impact on the country’s economy. The fatality rate from the flu in Sweden was comparable to most Western nations and its economy was similar to other developed countries.

The study of Sweden’s flu experience a century ago suggests there could be permanent negative long-term economic effects from the current pandemic. There was a decline in income from capital sources such as interest, dividends and rents of five per cent that lasted at least until 1929. This was a permanent decline not recovered once the flu pandemic passed. 

Permanent pain for the poor

There was also an increase in absolute poverty for those Swedes at the bottom of the economic pyramid: enrolment in government-run “poorhouses” in higher flu-incidence regions jumped 11 per cent and did not decline over the next decade. There was some good news: while employment income was reduced during the crisis, it quickly rebounded to predicted normal levels.

A recent study attempts to measure the effects of the influenza outbreak on 1918-21 GDP. Harvard economist Robert Barro and his colleagues painstakingly put together a set of economic data that attempts to recreate what GDP in 42 countries would have been. 

They found that the flu was responsible for an additional six per cent decline in global GDP. The study concludes that the effects were reversed by 1921. This estimate of the flu’s historical GDP effects is strikingly similar to the IMF’s current prediction of six per cent reduction in GDP for Western economies as a result of the coronavirus pandemic.

What economic models say

Beyond economic history, we can look at macroeconomic models of the global, regional or national economies that run scenarios about pandemic economic shocks. 

One scenario by British economists and health science academics is particularly apt in light of COVID-19. Their scenario models virus incidence and fatality rates close to the current best estimates and includes strong and early social distancing measures such as school closures and work-from-home arrangements that we see today in many countries fighting the pandemic.

Their model estimates a 21 per cent decline in U.K. GDP in the first full quarter of the pandemic, with a 4.45 per cent decline in GDP for the first year. The model also suggests the time frame to economic recovery is about two years. The current IMF projection for the U.K. is a 6.5 per cent decline in annual GDP.

There is no doubt that COVID-19 is a major shock to the global economy. Across all the studies I reviewed, the conclusion of a significant decline in GDP in the order of 4.5 to six per cent with full recovery within two years seems to be well justified.

Into the “unknowns”

For any model that attempts to connect a pandemic to macroeconomic activity, there will always be a fly in the ointment. In this case, there are actually four flies—or known “unknowns”—that could magnify or dilute predicted effects.

One, early development of an effective vaccine (within six months and implemented in a year). In the case of the 1918 outbreak, there were three waves of the outbreak (the middle wave was the deadliest) and an effective vaccine was never developed. For COVID-19, there is a global race to develop a vaccine, though scientists are quick to temper any hopes for a quick breakthrough.

Two, short incubation periods and brief periods of asymptomatic infection, in the range of two to three days. The World Health Organization (WHO) suggests COVID-19 has a long incubation period of up to two weeks, and that a significant percentage of asymptomatic people can transmit the disease without developing symptoms. Pandemic models generally have worse-case scenarios of 30 to 35 per cent of the population infected. This may be understating the population infection rate of the present coronavirus. 

Three, extensive mitigation measures adopted quickly. Models anticipate that social distancing measures, such as quarantines and the shutdown of schools, public entertainment and religious services, are rare and, in many studies, are downplayed. In the case of the 1918-20 flu, social distancing measures were relaxed as soon as positive results began to be seen. By contrast, public health authorities in most countries have been much more aggressive and unrelenting in the face of COVID-19.

Four, the effects of a service economy on economic recovery. The 1918-20 flu occurred when services represented at most 40 per cent of GDP in developed nations. Today in the West, services account for 70 to 80 per cent of GDP. Pandemic models of the U.K. economy in the early 2000s show that recovery is possible within two years even in an economy heavily oriented toward services.

It’s important to remember that GDP is a marker of a nation’s overall economic health. On an individual level, the effects may be more far-reaching and painful. There are financial and professional losses that may never be recovered.

The 1918-20 flu offers an important history lesson for the world’s current economic outlook: there may be significant declines in the returns to capital in the next decade, as well as relative increases in poverty for the neediest in our society.

Steven Salterio is a professor and Stephen J.R. Smith Chair of Accounting and Auditing at Smith School of Business.

A version of this article was originally posted on The Conversation.