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Feb. 25, 2020, 9:10 a.m. EST

If the coronavirus isn’t contained, a severe global recession is almost certain

Economists try to estimate the impact of a pandemic, but we just don’t know how bad it could get

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By Rex Nutting, MarketWatch

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Could GDP contract 4.5%?

Many economists have tried to model the economic consequences of a pandemic.

CBO did a study in 2005 and 2006, modeling the impact of a 1918-sized flu pandemic on the economy. They found that a pandemic “could produce a short-run impact on the worldwide economy similar in depth and duration to that of an average postwar recession in the United States.” Specifically, a severe pandemic could reduce U.S. gross domestic product by about 4.5%, followed by a sharp rebound.

The CBO assumed that 90 million people in the U.S. would get sick, and 2 million would die. There would also be demand-side effects, with an 80% decline in the arts and entertainment industries and a 67% decline in transportation. Retail and manufacturing would drop 10%.

The U.S. wasn’t prepared for a flu pandemic then, the CBO said, and it isn’t now.

Also read: White House seeks $2.5 billion in emergency funds to fight coronavirus

“If a pandemic were to occur in the near term, the options for the United States would be limited to attempts to control the spread of the virus and judicious use of limited medical facilities, personnel, and supplies,” the bipartisan agency concluded. “In the longer term, more tools are potentially available, including an increased treatment capacity, greater use of vaccines and antiviral drug stockpiles, and possible advances in medical technology.”

Other simulations of the U.S. and non-U.S. economies have found similar economic impacts, although that research came at an earlier stage of globalization, when our economy was not quite so reliant on far-flung supply chains.

Quarantining the economy

Much of the immediate economic impact of a pandemic can be traced to the efforts to contain it, rather than from the effects of the disease itself. As we attempt to quarantine those who might spread the disease, we shut down a lot of economic activity.

The quarantines might be the only way to slow the spread of COVID-19, but they could also hamper our response. Our health-care system also relies on vital inputs for medicines, supplies and equipment produced all over the world, including China and other hard-hit Asian economies. And of course we rely on the free flow of thousands of other goods and services.

The potential for disaster is sobering. The economies of the world are extraordinarily resilient, yet extraordinarily dependent upon each other in a crisis. Sadly, the things we need most to get us through this — wise leadership, global cooperation and clear thinking — are harder to find than a surgical mask.

Rex Nutting is a columnist and MarketWatch's international commentary editor, based in Washington. Follow him on Twitter @RexNutting.

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