It will be some time—years most likely—before the full extent of the economic blow from covid-19 can be estimated with any confidence. As ever more of the global economy enters a prolonged shutdown, it seems increasingly clear that the world is facing a drop in output unprecedented in its breadth and intensity. Some analysts see in the growing economic disruptions and market panic the first stirrings of an economic collapse more serious than the global financial crisis of 2007-09. Joachim Fels, an economist at PIMCO, an investment fund, recently warned that in the absence of sufficiently aggressive action from governments the world could face a market meltdown and ensuing depression. All downturns create discomfort, but the pain of a slump—even a very steep one—depends greatly on how long it lasts. History suggests that rapid rebounds from enormous output losses are possible, but not by any means guaranteed.
Importantly, this reflects the fact that the main causes of economic contraction—world wars—persisted and disrupted activity for several years. French output fell by more than 10% per year in 1940, 1941, 1942 and 1944, for example. Yet focusing on more recent experience, and on smaller initial output declines of just 5%, does not dramatically change the picture. Among the rich economies which experienced annual drops in GDP of more than 5% since 1960, output took an average of four years to return to its previous level. Again, there are examples of an immediate, robust recovery. By 1999, for instance, real GDP in South Korea had already risen well above the peak reached in early 1997, before the Asian financial crisis struck. Recoveries from the global financial crisis, in contrast, have been more sluggish. The Italian economy entered the covid-19 crisis having failed to regain the level of real output is achieved in 2008.
Catch the trade winds
Any lessons from these experiences should be applied to the world’s current situation with care. A dangerous pandemic working its way across a highly integrated global economy is an unprecedented event. Still, a few historical patterns are worth noting. First, and most obviously, the duration of the economic pain depends on how much goes wrong as a result of the initial shock. Germany and Austria fared worse than other first-world-war combatants because they lost the war and their empires, and suffered state collapse and hyperinflation. If countries today can survive massive output declines without sustaining much institutional damage, that bodes well for the pace of recovery.
And third, it is important to get the macroeconomic policy right. The global financial crisis, and the euro-area debt woes which followed, did not kill millions of people or destroy valuable infrastructure, but the sluggish recovery that followed left Europe both economically and politically vulnerable to new shocks.
Even the mildest brush with the coronavirus could prove economically destructive if governments are reluctant to provide enough stimulus. The world should be able to bounce back to growth once covid-19 is brought under control. It has only to avoid the errors of history.