Global pandemic: Economic effects

Any statement on the macroeconomic effects of a global pandemic will largely depend on the scenario chosen as a basis. The most important parameters are duration, spread, and infection and mortality rates. Although a very serious pandemic scenario comparable with the Spanish flu of 1918 would be unlikely to result in economic activity collapsing entirely, major economic setbacks would certainly have to be expected. International organisations and research institutes estimate that real GDP would decline by more than 5%.

Consequences for the real economy

A pandemic would lead to millions of people not going to work, and that would mean a gigantic loss of economic output. Moreover, the infrastructure would be disrupted significantly and production and supply chains interrupted, thus reducing the availability of goods. On the other hand, a massive drop in private consumption and a decrease in investment activity would drive demand downwards.

The areas likely to be affected most are those requiring social contact (tourism, aviation, etc.), the construction industry, and industries strongly dependent on the state of the economy, such as the automobile sector. As far as insurance is concerned, mounting insolvencies due to the poorer economic situation would impact credit insurance. As international trade would be disrupted, export-oriented economies would be hit worst. Despite initial price increases for selected goods like food and medicine, the effects of a serious pandemic would tend to be deflationary in global terms.

Strong impact on capital markets, depending on the scenario

More difficult to predict is how the capital markets would react; the actual effects of a pandemic would be driven primarily by the psychological impact. And at present, this is still a matter of speculation. Generally speaking, there should be a substantial shift in demand from shares to bonds due to growing risk aversion among investors, thus putting pressure on share prices worldwide and interest rates.

The extent and duration of share price losses greatly depends on the severity of the pandemic and its impact on the real economy. The price increase on the bond markets and the associated lower interest rates will probably tend to last longer. This is because, in addition to demand increasing, the central banks must be expected to adopt an expansive monetary policy with the aim of mitigating the shock, particularly if there is a trend towards deflation.

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