While similar to the 1918 Spanish flu pandemic, the COVID-19 crisis will have a different impact on the global economy, which has changed dramatically in the past 102 years. Swiss Re explains why in the May 13 edition of its Economic Insights report.

“With the 1918 flu outbreak, government spending on war efforts more than made up for the drop in consumption and private investments. This prevented a massive contraction akin to what is happening in 2020. Today, the supply side of the economy is also impacted by strict lockdown, and government demand will not provide the same support [as in 1918],” states Swiss Re.

Different pandemics

“There are important differences” between the two pandemics, notes Swiss Re. For one thing, the 1918 flu inflicted a high death rate in otherwise healthy adults, while, withCOVID-19, the most affected are the vulnerable, such as the elderly. For another, “after World War I, families were robbed of their breadwinners, resulting in labour scarcity and putting upward pressure on real wages,” continues the report, adding that things are very different today. “The pandemic may lead to high unemployment levels across a number of economies. Inflation risks…may resurface upon the revival of consumer demand propped up by fiscal stimulus, if supply chain disruptions persist, not because of labour shortages,” explains Swiss Re.

The recovery will also be different

The economic recovery from COVID-19 may also “prove more challenging than in the aftermath of the Spanish flu,” warns Swiss Re, noting that, in the early twentieth century, the manufacturing sector was a large driver of the economy, but the services sector is much more important today.

The report adds that, with the Spanish flu, “the downturn was relatively short lived since many had saved during war time, and higher wages also boosted consumption.”

Looking ahead

Swiss Re has revised down its forecast for 2020 global growth to -3.8% from its earlier forecast of -1.2%. It believes the subsequent rebound in 2021 “will be only partial,” leaving a cumulative loss to global GDP of $12 trillion by the end of 2021.

Swiss Re believes that, to recover from this crisis, “in addition to cushioning the impact of COVID-19, governments need to look beyond the outbreak for new drivers of sustainable growth, such as renewed spending on infrastructure.”