The EconomistMarch 21st 2020 Finance & economics 65I
t willbesometime—yearsmostlikely—beforethefullextentof
the economic blow from covid-19 can be estimated with any con-
fidence. 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 pan-
ic 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 re-
bounds from enormous output losses are possible, but not by any
means guaranteed.
Some economies, perhaps those of Singapore or even South Ko-
rea, could find a footing by the second half of the year, sufficient to
offset some of the production lost during the first half. But the
probability that others could experience extreme declines in gdp
in 2020—perhaps as large as 10%—grows by the day. Falls of that
magnitude are not especially unusual in developing economies,
where growth is highly volatile. (To take just one example, there
have been ten years since 1980 in which real gdpin Libya has fallen
by at least 10%, between which plunges the economy has experi-
enced annual growth spurts of as much as 125%.) In industrialised
countries swings of that scale are exceedingly rare. An analysis of
data gathered by the World Bank reveals that since 1960, across rich
countries, there have been only 13 instances in which an economy
experienced an annual decline in gdpof at least 5%, only three
cases in which output fell by at least 7% in one year (Finland in
2009, and Greece in 2011 and 2012), and none in which output
dropped by more than 10%. In the rich world, clusters of large de-
creases in gdpappear on the heels of the 1973 oil crisis, during the
Asian financial crisis of 1997-98, and as part of the global financial
crisis and its aftermath.
A longer perspective reinforces the rarity of such events. Eco-
nomic historians at the University of Groningen, in the Nether-
lands, maintain a cross-country set of gdpdata stretching far into
the past. Since 1870, across 18 industrialised economies, there have
been only 47 instances in which a country experienced an annual
decline in output of more than 10%. Most are associated with
world wars and the Depression; of the 47 large output declines, 42occurredbetween 1914 and 1945 (see left-hand chart).
How do countries fare after suffering such economic blows?
Recoveries are occasionally quite rapid. At the end of the world
wars, a few economies experienced near-immediate bursts of
growth—partly, but not always, because of rebuilding. The belea-
guered Italian economy grew by about 35% in 1946. By 1949 it had
already recovered all the ground it lost during the war and then
some. The German economy shrank by a staggering 66% from 1944
to 1946, then grew at an annual average rate of 12% over the subse-
quent decade. In other cases rebounds are less robust. In 1924 real
output in both Germany and Austria remained below the levels be-
fore 1914. Across the period from 1870, it took an average of five
years for output in countries that experienced declines in gdpof
more than 10% to regain their peak (see right-hand chart).
Importantly, this reflects the fact that the main causes of eco-
nomic 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 gdpof more than 5% since
1960, output took an average of four years to return to its previous
level. Again, there are examples of immediate, robust recovery. By
1999, for instance, real gdpin South Korea had already risen well
above the peak reached in early 1997, before the Asian financial cri-
sis struck. Recoveries from the global financial crisis, in contrast,
have been more sluggish. The Italian economy entered the co-
vid-19 crisis having failed to regain the level of real output it
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 work-
ing its way across a highly integrated global economy is an unprec-
edented event. Still, a few historical patterns are worth noting.
First, and most obviously, the duration of the economic pain de-
pends on how much goes wrong as a result of the initial shock.
Germany and Austria fared worse than other first-world-war com-
batants 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.
Second, large drops in output often accompany a fracturing of
global trade networks. The success with which those trade ties are
restored matters for the robustness of the economic rebound.
Western Europe enjoyed explosive growth in the years after the
second world war, thanks in part to efforts to knit trade back to-
gether—a very different outcome from that following the first.
Similarly, the world must hope that trade recovers quickly when
the pandemic ebbs.
And third, it is important to get macroeconomic policy right.
The global financial crisis, and the euro-area debt woes which fol-
lowed, did not kill millions of people or destroy valuable infra-
structure, 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 eco-
nomically 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. 7Free exchange From V to victory
Economies can recover quickly from massive slumps in gdp—but not alwaysBustandboomerangSources:Maddisonproject;TheEconomist *Sampleof 18 industrialisedcountriesfrom1870-2016Worst-performing
AverageBest-performingOneyearlater
Two years
Five years
Ten years150100500-50-100
Initial decline5 4 3 2 1 01870 1900 604020 80 2016Number of rich countries with
GDP declines of more than 10%*Recovery from a more than 10%
decline in GDP in a year, % change