The Special Economic Impact of Pandemics

When millions of people in the United States and around the world entered a lockdown in March 2020, a ripple effect throughout the economy was inevitable. As necessary as these steps were to bring the coronavirus outbreak under control from a medical standpoint, there was a flipside: Large swaths of the economy ground to a halt. And because this pandemic is global, the repercussions have been felt globally as well. 

Just how severely has COVID-19 impacted the economy? The Federal Reserve Bank of St. Louis notes the economic slump in the early months of the pandemic rivaled the initial declines of the Great Depression.

The U.S. economy started to rebound later in 2020 after unprecedented stimulus measures that continued into 2021. U.S. Federal Reserve Chair Jerome Powell said, in a March 2021 interview with NPR, that the U.S. economy was on the path to recovery, comparing combined stimulus efforts by the Fed and Congress to the World War II battle of Dunkirk. In addition, the the U.S. federal government stepped up its vaccine efforts in 2021, which slowed the spread of the virus and enabled more businesses to reopen.

Still, the pandemic and its economic impact is far from over.

The Interconnected Economy

Certain industries, such as travel and hospitality, felt the pandemic’s impact most directly. Shops and restaurants closed their doors altogether or opened with low seating capacity and low demand to dine in. Non-essential travel evaporated, causing massive lost revenues for not just airlines and cruise-ship operators, but smaller businesses that rely on tourism revenue.

Those employed in seemingly unrelated industries also felt the secondary effects of social distancing. For example, manufacturers, especially those outside the medical field, saw fewer orders as shopping slowed down and demand for nonessential goods, such as new clothes, dwindled. Banks absorbed the loss of mortgage payments, due to government-mandated forbearance rules. And oil companies saw prices plummet—even turning negative in April 2020, for the first time in history—as investors sensed weaker demand, given the lack of even everyday travel.

The fear of the unknown only exacerbated these economic impacts. Even individuals and families with ostensibly stable employment limited their purchases in case the financial aftershock couldn’t be contained.

Measuring the Effect of a Pandemic

Every pandemic is unique, which makes measuring the repercussions of this type of crisis especially challenging. What’s more, there simply aren’t many examples that compare to the worst-case estimates of COVID-19’s effects. For example, the H1N1 flu of 2009 was widespread, but not as deadly. The Centers for Disease Control estimate there were 60 million cases in the U.S., resulting in fewer than 13,000 deaths.

The closest modern comparison to the COVID-19 pandemic occurred more than a century ago when the so-called Spanish Flu (another H1N1 virus, though a different strain than the 2009 version) ravaged the globe between 1918 and 1919. According to CDC estimates, roughly 500 million people became ill with the disease, which ultimately took the lives of about 50 million worldwide.

Economic data from the early 20^th century is scarce. However, an analysis by the Federal Reserve Bank of St. Louis estimated that a lot of businesses, particularly service- and entertainment-oriented ones, “suffered double-digit losses in revenue.” Back then, the economic disruption was short-lived, as the underlying health emergency subsided in 1919.

How does the current pandemic compare? While the mortality rate of COVID-19 is was significantly lower than that of the Spanish Flu, its economic toll is already severe. Because the underlying virus is so contagious—a group of researchers from the University of Hong Kong and Harvard University estimated that one-quarter to one-half of the world’s population would likely contract the virus “absent drastic control measures or a vaccine”—governments around the world took drastic measures to control its spread. But those actions, which included keeping most shoppers and restaurant patrons at home, came at a big economic price.

The Economic Impact of COVID-19

Many workers and potential shoppers sequestered themselves in the early days of the COVID-19 pandemic, which had a momentous impact on the global economy, as well as that of the United States. In the U.S., for example, retail sales plunged in April 2020 before recovering in July. On top of that, data from the Federal Reserve showed the worst dip in manufacturing output since the 1940s, although it has since rebounded.

Of course, that sudden drop in demand had a disastrous effect on employment. The national unemployment rate climbed as high as 14.8% in April 2020 before dropping to 6.2% in February 2021. By July 2021, it had dropped to 5.4%. Additional estimates indicated more than 25.7 million workers were affected by the pandemic. This figure included those whose hours or compensation were cut and those who were completely unemployed, among others.

Those economic shock-waves were felt from Beijing to Madrid, creating a drag on the world economy that hasn’t been seen for decades. In January 2021, the International Monetary Fund (IMF) forecast that the global economy had contracted by 3.5% in 2020—the worst slide in recent memory. However, the IMF envisioned a robust recovery in 2021 and 2022, with worldwide growth of 5.5% and 4.2%, respectively. The Congressional Budget Office forecasts that the U.S. economy will grow by 7.4% in 2021.

The Role of Government Intervention

In an ideal scenario, legislatures and central banks use the power of the purse to help mitigate an economic crisis. The U.S. passed several rounds of stimulus legislation. In March 2020, U.S. lawmakers passed a $2 trillion stimulus bill, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, to blunt the economic impact of the global coronavirus pandemic. On Mar. 27, 2020, President Donald Trump signed the bill into law, with a number of measures aimed to help the American public.

Efforts to open up the U.S. Treasury and send money directly to households helped newly unemployed individuals or those with reduced working hours. And interest rate cuts helped to boost liquidity at a time when money was tight. The Fed slashed a key rate to near zero in March 2020.

Those aren’t the only devices that governments have in their toolkits. They can activate short-term financing mechanisms that help businesses stay afloat and retain workers during the crisis. And they can bolster unemployment insurance and provide other safety nets that keep the most vulnerable residents from losing their homes or going hungry. The stimulus packages in the U.S. included measures to address these issues.

Preparing Yourself Financially

While pandemics can cause significant economic damage, at least in the short term, there are steps you can take to protect your finances as much as possible. It’s never too late and you never know when an emergency will strike. Here are a few of the measures you might consider to emergency-proof your finances:

Build up your emergency fund

Conventional wisdom dictates that you should have three to six months’ worth of expenses readily available in your bank account at all times. A pandemic is one of the scenarios for which they’re intended. So if you’re a little short of the mark, now’s the time to build up your reserve if you can—you never know if you might need it.

Dust off your résumé

As businesses continue to reopen fully more jobs are becoming available. Start connecting with people who might be able to aid your job search and make sure your résumé is in good shape. If you work in a hard-hit industry, now might be the time to start looking at other job opportunities.

Seek financial relief

Those who saw their incomes drop or evaporate as a result of the pandemic might find it hard to pay their mortgage, rent, or student loans. As part of the stimulus packages, the U.S. federal government provided relief for many of those who couldn’t pay these bills as a result of of the economic impact of the pandemic.

If you are struggling financially, it’s always better to reach out to your lenders as soon as possible, rather than fall behind on payments without contacting them. The worst thing you can do when you miss a payment is to keep your creditors in the dark.

The Bottom Line

The initial economic impact of the COVID-19 pandemic was catastrophic and widespread. The disruption to the world economy resulted in millions of people losing their livelihoods. While the U.S. economy continues to recover, the pandemic and its impact are far from over. In the meantime, its never too late to analyze your financial situation and plan for the worst.