Economics in the Time of COVID-19
This ‘direct’ impact of the pandemic will reduce GDP in that quarter by a few percentage
points. The precise number will depend on what proportion of the population that get
sick, on what the fatality rate in the UK turns out to be, and how many people miss work
in an attempt not to get the disease. The impact on GDP for the whole year following the
pandemic is much less, at around 1% or 2%, partly because output after the pandemic
quarter is higher as firms replenish diminished stocks and meet postponed demand.
All this assumes schools do not close once the pandemic takes hold. School closures
can amplify the reduction in labour supply if some workers are forced to take time off
to look after children. On the basis of the assumptions we made, if schools close for
around four weeks, that can multiply the GDP impacts above by as much as a factor of
three, and if they close for a whole quarter, by twice that. If that seems large, remember
that nationwide school closures impact everyone with children and not just those with
the disease.
But even with all schools closed for three months and many people avoiding work
when they were not sick, the largest impact we got for GDP loss over a year was less
than 5%. That is a one quarter very severe recession, but there is no reason why the
economy cannot bounce back to full strength once the pandemic is over. Unlike a
normal recession, information on the cause of the output loss, and therefore when it
should end, is clear.
All this assumes that consumers who have not yet got the disease do not alter their
behaviour. For a pandemic that spreads gradually, this seems unlikely. The most
important lesson I learnt from doing this study is that the pandemic need not just
be a supply shock; it can also be a demand shock that can hit specific sectors very
hard, depending on how consumers behave. This is because a lot of our consumption
nowadays can be called social, by which I mean doing things that bring you into contact
with other people – things like going to the pub, to restaurants, to football matches or
travel. Other sectors that provide consumption services that involve personal contact
(e.g. haircuts) and can easily be postponed may also be hit.
If people start worrying about getting the disease sufficiently to cut back on this social
consumption, the economic impact will be more severe than any numbers discussed so
far. One reason it is severe is that it is partly a permanent loss. Maybe you will have a
few more meals out once the pandemic is over to make up for what you missed when
you stayed home, but there is likely to be a net fall in your consumption of meals
out over the year. What I realised when I did the analysis was just how much of our
consumption was social.