Potential Economic Impact of the Pandemic – Lessons from 1918 Spanish Flu

It is obviously way to early to accurately predict the economic impact.  But international entrepreneurs and expats do not have the luxury of staying still in “wait and see” mode.  So a rough sense of outcomes is needed to help forward planning


Lessons from 1918 Spanish Flu
The 1918 Flu Pandemic which lasted from January 1918 to December 1920, is estimated to have infected 500 million people, or one-third of the world’s population.  This led to around 50 million deaths worldwide, with 550,000-675,000 occurring in the United States.  The pandemic thus killed about 0.66 percent of the U.S. population.  But a key difference from the present pandemic is that Spanish Flu was fatal for young (18-44), healthy adults.

NPIs or Non-pharmaceutical interventions implemented in 1918 mirror many of the policies used today.  They included closure of schools, theaters, churches, bans on public gatherings and funerals, quarantines of suspected cases, and restrictions on business hours.

Research published in April 2020 by the World Economic Forum makes two key if somewhat obvious points – 

  • First, areas that were more severely affected by the 1918 Flu Pandemic saw a sharp and persistent decline in real economic activity. 
  • Second, we find that cities that implemented early and extensive NPIs suffered no adverse economic effects over the medium term. On the contrary, cities that intervened earlier and more aggressively experienced a relative increase in real economic activity after the pandemic subsided. 

As would be expected, severely affected areas experienced a relative decline in manufacturing employment, manufacturing output, bank assets, and durable goods consumption.  Exposed areas also saw a rise in bank charge-offs, reflecting an increase in business and household defaults. These patterns are consistent with the notion that pandemics depress economic activity through reductions in both supply and demand.  Importantly, the declines in all outcomes were persistent, and more affected areas remained depressed relative to less exposed areas from 1919 through 1923. 

Consistent with this empirical evidence, the large economic disruption caused by the pandemic is also evident in narrative accounts from contemporaneous newspapers. For instance, on October 24, 1918, the Wall Street Journal wrote:
“In some parts of the country [the pandemic] has caused a decrease in production of approximately 50 percent and almost everywhere it has occasioned more or less falling off. The loss of trade which the retail merchants throughout the country have met with has been very large. The impairment of efficiency has also been noticeable. There never has been in this country, so the experts say, so complete domination by an epidemic as has been the case with this one.”

Comparing cities by the speed and aggressiveness of NPIs, early and forceful NPIs did not worsen the economic downturn. On the contrary, cities that intervened earlier and more aggressively experienced a relative increase in manufacturing employment, manufacturing output, and bank assets in 1919, after the end of the pandemic.  Regression modeling suggest that the effects were economically sizable.  So reacting ten days earlier to the arrival of the pandemic in a given city increased manufacturing employment by around 5 percent in the post-pandemic period. Likewise, implementing NPIs for an additional fifty days increased manufacturing employment by 6.5 percent after the pandemic.

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