The Pandemic Requires a Coordinated Global Economic Response

Alicia Garcia Herrero, Natixis Asia Pacific Chief Economist, Bruegel Senior Fellow

Global pandemics are costly for many reasons. First and foremost, for their death toll and, more generally, for health and social reasons. The second reason is economic. I will focus on the latter given my field of expertise.

The economic impact of a pandemic depends upon the way it is tackled both from a health and an economic perspective. Regarding the former, strategies to deal with pandemics are mainly twofold, with two different economic outcomes. The first, mitigation, focuses on slowing but not necessarily stopping the spread of the virus, with the objective of reducing peak healthcare demand while protecting those most at risk. The second, suppression, aims at reversing the epidemic growth but with the risk of a rebound any time the suppression measures are lifted. The first is bound to last longer but have less intense social and economic consequences. The second should be faster but also carries extreme economic consequences, not only due to vanishing demand but also collapsing supply. The hope, though, is that the economy can recover more quickly as long as there is no pick-up in the number of cases. It should be noted that a pandemic tends to have a timeframe of 18 months, until a vaccine becomes available.

Before moving to the economic policy responses to the pandemic depending on the disease containment response given (mitigation or suppression), it seems important to understand how different the economic consequences may be. Mitigation, being a longer but less abrupt strategy, should have a negative impact on demand but less so on supply as the population will not be fully locked down. In other words, depression (deflation and recession) is the most likely economic outcome. If a government chooses to suppress the pandemic, as China did, especially in Hubei province, the supply shock might be greater, as most tasks requiring physical presence cannot be performed in a full lockdown. Within that context, stagflation (high inflation and recession) is the most likely scenario.

The response to depression is well known as the Keynesian policies that were introduced after the Great Depression were widely reviewed in standard economic textbooks. Massive…