Post COVID-19 economic recovery scenarios with lessons from Spanish Flu pandemic

Dear Readers,

It’s now more than 2 months since the pandemic first emerged in Italy and the world outside mainland China and parts of Asia. It has now peaked in the developed world mainly western Europe and United States (U.S.) leaving a trail of destruction never seen since World War 2. The figures suggest more than 270,000 dead and millions left without a job. These numbers would rise exponentially as cases rise in the emerging world countries. The IMF has predicted that the world economy would contract by 3% far worse than the contraction (1.5%) in 2008-09. There has been several view points about how the recovery would be post the pandemic. With no perfect correlation with past global crisis no one knows for sure when and how it will happen.I have tried to borrow some lessons from the Spanish Flu (1918-1920) and the economy recovery that followed in the U.S.

Spanish Flu (1918 – 1920) :

  • Origin: Unlike its name the flu didn’t originate in Spain. Some historians suggest it originated in the U.S. while others predict the place of origin to be somewhere in Europe. It thus happened that post the World War I several countries had put restrictions on media reporting and thus didn’t report the flu from its initial days. Spain as a neutral country in the war had no such restriction and thus reported it from the beginning and the world started to know it as a Spanish Flu.
  • Fatality: According to data in the public domain 675,000 people died in U.S. alone and 40 Million globally. In all recorded data from history only the black death of 1348-51 in Europe is estimated to have killed more people (Excess of 60 Million)
  • Unemployment: The unemployment level reached around 11% during the pandemic and gradually decreased to around 4% as economic recovery picked up around 1923.
  1. End of World War 1: The war ended and with it the industrial boom to support it got stalled. The return of the veterans led to rise in civilian labour and contributed to rise in unemployment in U.S. during the period.
  2. High Interest Rate: The fed in order to fight inflation increased the rates which led to further contraction in the economy.

Lessons from Spanish Flu Recovery: 

  1. Early Implementation of Social Distancing Norms: A study co-authored by an MIT Economist using data from the flu pandemic that swept the U.S. in 1918-1919, finds cities that acted more emphatically to limit social and civic interactions had more economic growth following the period of restrictions. Cities that implemented social-distancing and other public health interventions just 10 days earlier than their counterparts saw a 5 percent relative increase in manufacturing employment after the pandemic ended, through 1923. Similarly, an extra 50 days of social distancing was worth a 6.5 percent increase in manufacturing employment, in a given city.
  2. Change in Government (Fiscal Policy): In November 1920, Senator Warren G. Harding, with his running mate, Calvin Coolidge, was elected president in a landslide. His actions to repair the economy led to farm tariffs to support the agricultural sector and significant tax cuts.
  3. Drop in Interest Rates (Monetary Policy): The Fed reduced its rates which made it easier to borrow and start a cycle of economic boom.
  4. Manufacturing Boom: The combination of technology and pent-up demand produced an economic renaissance that led to the roaring U.S. economy of the 1920s. Use of electricity became widespread, sparking economic growth and greater productivity. Mass manufacturing of millions of cars fueled by highway construction led to growth in hotels, gas stations, and restaurants which became essential to accommodate the tourists. Radio linked the nation and movies provided mass entertainment.

Now let us fast forward to COVID-19 and analyze the different scenarios of recovery in the U.S. and the world. The depth and speed of the decline will rival that of the Great Depression of 1930s. But will the aftermath be as painful? Or will the economy swiftly recover once the pandemic has passed as in 1920s? And when will that be?


Optimistic: V Shaped Recovery

The economy contracts in the short term (1-2 quarters) but very quickly returns to its pre-pandemic baseline once social distancing is lifted.  The discretionary purchases foregone, vacation trips not taken, restaurant meals not purchased, movies not seen come back with a roar to the pre pandemic or higher level.

Somewhat pessimistic and more likely Outcome: U Shaped Recovery 

The effects of the pandemic on economic activity last much beyond the end of lockdown, and GDP recovers slowly. Even after the health risks subside, the economy still doesn’t quickly go back to where it would have been, though it does reach that spot eventually.

Also possible: W shaped recovery 

If the lifting or ease of restrictions is followed by a surge in COVID-19 cases and another round of closures in the fall, the recovery could be W-shaped. This could be quite frustrating for the economy.


At the beginning of the pandemic, very few understood how long it would be before life returned to normal, and many economists talked of V-shaped recoveries. Many now believe that, unless major improvements in COVID treatment to make it less fatal, only a vaccine can allow economic activity to return to the pre-pandemic baseline. Even once the economy starts to reopen, measures will likely be in place that curtail economic activity to some degree—travel will be less frequent, businesses will have to adopt distancing measures for workers and customers, restaurants will be serving fewer customers at a time, and sporting events, concerts, and other activities involving large crowds probably will remain off limits for a long time. And even if the rules allow, many people may be reluctant to return to pre pandemic period social life.

A key question is whether damage to the economy’s capacity to produce goods and services will be long lasting or will it heal faster.

The damage to the economy comes in four broad categories:

Household ability and willingness to spend: When workers lose their jobs, they are likely to drain savings and increase borrowing. They may delay payments on mortgages and credit cards, and their credit ratings may decline. And they may become more fearful about the future. That means that—even once the economy opens up again—they may be unable or unwilling to spend as readily as they did before the virus appeared. The fear of the virus needs to go for people to start spending again especially on discretionary items.

State and local government finances: Governments generally have to balance their budgets each year. As income and sales tax revenues plummet and demand for fiscal stimulus and other programs increase, the Governments will have to cut spending—mostly on infrastructure projects or raise indirect taxes. It took roughly 10 years for state and local employment to rebound to pre-recession levels after the Great Recession in U.S.

Businesses—bankruptcies and lower investment: If a business declares bankruptcy and shuts down during the pandemic, it will not only affect its promoters and employees but other businesses dependent on it. The enter supply chain and related businesses get affected by it. In addition, even once the economy reopens, firms may be fearful that it will close again—either from a resurgence of corona or from a new virus—and may be less likely to invest in capital expansion or research and development. This decline in investment could make the firms less productive than they would have been, also holding down GDP.

Lost human capital & Structural Unemployment:  The bond between workers and firms takes a long time to build. Employers and workers typically spend a lot of time in finding a good “match,” and workers then acquire firm-specific skills and knowledge. If businesses lay off their workers during the lockdowns, those workers might start looking for other jobs, or they may leave the labor market altogether. That means that all that human capital will be lost. Once firms can reopen, they may have to start the process of finding and training workers again or may replace humans with machines. This will also slow the recovery because machines don’t consume which can boost GDP.


  • Public Health: The first goal of public policy in the pandemic should be first to protect public health—implementing social distancing, investing in personal protective equipment for health care workers, greatly ramping up testing and tracing, and doing everything possible to speed up the development and production of vaccines. Not only will this save lives, but it will also create the conditions that will allow the economic recovery to begin.
  • Fiscal Measures: Apart from these measures, the fiscal policy of the government  can do a lot to ensure that the recovery is as fast as possible.  Many measures have already been taken in U.S.including $660 billion in forgivable loans to small businesses, $300 billion in recovery rebate checks to households ($1200 a person for most adults, and $500 for most children), and $268 billion in increased and expanded unemployment insurance ($600 extra per week, and expansion of eligibility to gig workers and the self-employed). These measures will help keep finances of many—though not all—households and businesses in reasonably good shape. The U.S. is expected to add more stimulus in the coming weeks as political parties risk annoying the voters in an election year. Similar policy steps and stimulus measures have been taken by other Governments around the world.
  • Monetary Measures: The U.S. Federal Reserve, European Central Bank and the Central Banks across the world have adopted an expansionary monetary policy with reduced interest rates and bond buying programs to inject liquidity. 
  • Encourage a new revolution: The recovery post 1920 in U.S. was due to electrification and car manufacturing. There needs to be an incentive to spur a new revolution particularly in the developing world to spur global growth.

It remains to be seen what shape the recovery would take and how these measures will help deliver a rather a V or U shaped recovery than a W shaped recovery.


Stay Safe and Take Care !


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