A study published by the National Bureau of Economic Research, the most prestigious economic research institution in the US, points out the possibility that the current global pandemic of Covid-19 could lead to an extreme scenario (“worst case scenario”) Of 150 million deaths, 6.5 million of them in the US, and vertical falls in global GDP and consumption.
The work, headed by Robert Barro, a professor at Harvard University and several times singled out as a possible Nobel Prize in Economics, compares the 1918-1920 pandemic of the “Spanish flu” with the current crisis and based on the contagion and mortality rates of then and now. An extreme scenario that, he says, would not materialize because the public health systems and the monitoring and quarantine procedures in place are much more advanced than the tools the pandemic faced a century ago. In turn, he acknowledges, today’s increased international mobility plays in the opposite direction. In this regard, it should be remembered that the current virus spread with the departure of millions of Chinese and foreigners from China to other countries between the date the first human case occurred until, on January 23, the Asian power published the situation and started the greatest isolation in the history of humanity.
The paper is based on historical databases for 43 countries that had, in the 1918 to 1920 pandemic, a total of 39 million deaths, 2% of the world’s population at the time. In the same way it calculates – and analytically separates, with econometric methods – the economic impact, to distinguish it from that of the immediately preceding First World War.
Among the historical curiosities, the work indicates that that pandemic killed Frederick Trump, paternal grandfather of Donald trump, and affected the then president of the United States, Woodrow Wilson, who survived but was greatly weakened by the disease, which in part explains the failure of his “League of Nations” project and his inability to prevent England, France and France from imposing war reparations on the Versailles Treaty humiliating and costly which, in turn, were singled out among the causes of the rise of Nazism and the Second World War.
The unjustly called “Spanish flu” (because the Spanish press, which had not participated in the war, was the one that most alerted about the disease, which affected King Alfonso XIII) claimed 16.7 million lives in India (mega-population until today relatively untouched by the coronavirus, but cause for concern for its social and health conditions), 8.1 million in China and 550.00 in the US, the paper says. South Africa and Indonesia also had extremely high death rates.
Regarding economic effects, the pandemic of a century ago meant a drop of 6% in the GDP per capita of a “typical country” (and population decimated), which places it as the fourth largest “economic disaster” since 1870 to today, behind the Second World War, the “Great Depression” of the 30s and the First World War. Some nations, such as India and Canada, experienced recessions of over 15%.
Taking that background into account, the current crisis would correspond to a 6% drop in GDP and 8% in consumption. “The possibility exists not only of an unprecedented number of deaths, but also of a major economic contraction,” says a passage from the paper, which in its final part points to a dilemma of the present. Improvements in public health and measures taken to mitigate the spread make human costs as unlikely as high as a century ago, but they also mean higher economic costs, with incalculable ramifications. “Clearly,” concludes the work, “there is a difficult relationship between lives and material goods, and very little discussion on how to act on it.”
More expeditious, in an article published by Project Syndicate, Nouriel RoubiniNicknamed the “Doctor Catastrophe” for his successes in past recessions, he reaches tremendous conclusions based on recent indicators. Among them, that the current stock market decline equaled in three weeks what it took three years in the Depression of the 1930s; that large investment banks (Goldman Sachs, JPMorgan, Morgan Stanley) expect the US GDP to fall between 24 and 30% in the second quarter, and that Treasury Secretary Steve Mnuchin himself warned that unemployment is currently low historical, could exceed 20%.
Each component of aggregate demand is in free fall. So according to Roubini -which last February predicted a “total default” of Argentina- Those who expect a recession in the form of a U (gradual exit) or V (strong rebound) or L (subsequent stagnation) err. The current risk, he says, is an I: vertical drop with no floor in sight. The expert founds his apparent alarmism that “even in the Great Depression or in the Second War, economic activity was literally closed, as China, the US and Europe have done now”
The “best scenario”, he says, would be a sharper but shorter recession than that of 2008/2009, so that economic activity will grow again towards the end of the year. But for that to happen, list, three conditions must be met: 1) that the US, Europe and other seriously infected countries carry out massive tests, traceability, treatments and quarantines as China did, and deploy antivirals on a massive scale, because the vaccine will not be in less than 18 months; two) that the Central Banks throw the house out the window, with zero interest rates, free-hand credit and massive purchase of assets from insolvent companies, and 3) central countries to inject large fiscal stimulus packages, accepting deficits of up to more than 10% of GDP. And all that, he says, must be “entirely monetized”; the world does not give for more debt. Otherwise, says Roubini, who acknowledges the true risk of a global wave of inflation, the risk of a “bigger Depression” (than that of the 1930s) increases every day.
For the worse, the “Doctor Catastrophe” season his forecast with geopolitical condiments. Even if the pandemic and its economic impact can be controlled, he continues, there is a tail of risk of “white swan”, such as renewed conflicts between the US and its main antagonists (China, Russia, Iran and North Korea) in the form of wars. asymmetric. For example, another powerful hacking war that complicates even violence in the next US presidential election.
Also, remember, markets continue to underestimate issues such as a possible war between the United States and Iran, this year, or an escalation of acrimony between Washington and Beijing due to the coronavirus.
An uncontained pandemic, an insufficient arsenal of economic policy measures and the possibility of some geopolitical “white swan”, concludes the Turkish-born economist, of Jewish-Iranian descent, long stays in Iran and Italy and current professor in the US, reaching to plunge the world economy into a persistent depression.
In the 2008 crisis, he says, the response was enough to get out of the abyss. “This time -close- maybe we will not be so lucky.”
Less apocalyptic and more moralistic is Martin Wolf, a historical columnist for the Financial Times, who defines the virus as an “ethical challenge” to humanity. The pandemic will pass, he says, but the way we deal with it will shape the world to come. In this regard, he cites two decisive choices: the first, between a strategy of “suppression” (quarantines capable of destroying the economy) or of “mitigation” (tentative, alternate measures, capable of overwhelming and collapsing health systems); the second, between global cooperation or “national” solutions.
Wolf highlights the extremely high cost that the “emerging” countries face with an IMF figure: investors have already withdrawn USD 83,000 million from there. That, he says, added to the fall in the price of commodities and the weakening of domestic demand, would make it impossible to manage the situation. The financing gap, he continues, exceeds the lending capacity of the IMF and exposes the least developed countries to the risk of an economic collapse, a risk that also haunts the eurozone.
Hence, he says, the need for cooperation, removing, for example, the state control measures that are “destroying” medical supply chains.
“Solidarity or hostility? Global responsibility or nationalism? Bequeath a better post-pandemic world or a worse one? ”Wolf finally asks. “Unlike viruses, humans can choose. Let’s choose well ”.
Schmieding, as Pangloss
The most optimistic view is that of Holger Schmieding, former professor at the Kiel Institute for World Economics and current chief economist at London’s Berenberg Bank. In an article in the digital publication The Globalist, Schmieding predicts that the world will regain its current global GDP in less than two years once the lowest (still undetermined) point of the “coronacrash” has passed.
At least until May, he says, the economy will continue to contract, following the infection curve, which in three days increased 61% in Europe and 185% in the US. But Schmieding points out that unlike other crises, in this one the central countries are not hesitating to ignore the fiscal and monetary rules.
“This unprecedented political response will prevent a financial crisis that would otherwise exacerbate the recession as the world faces the health emergency,” he says. This will increase what is already a large debt burden, but in return the “post-crown” interest rates will remain very low for many years, which will help to cope with the situation.
Therefore, Schmieding concludes, although in the short term the prediction risks are all down, each factory, machine or worker that now “goes off” will also mean a very fast rebound when it is turned on again.