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Global economy—COVID-19 edition

Lessons from history

The Spanish Flu, the Great Depression, World War II - the economic fallout from these events may help predict what's coming due to COVID-19. Deloitte global economist Ira Kalish talks with host Tanya about what we may encounter.

“There has been a point of view that there is a choice between suppressing the virus and having a robust economy. My view is that, it’s a false choice.”
—Ira Kalish, Deloitte’s chief global economist

Ira Kalish: There has been a point of view that there is a choice between suppressing the virus and having a robust economy. My view is that, it’s a false choice.

Tanya Ott: Today on the Press Room—what history tells us about a disease like the novel coronavirus and the economy.

Tanya: I’m Tanya Ott and we’re going to get right to it because you don’t need me telling you what the biggest story in the news is today. I invited Deloitte’s chief global economist, Ira Kalish, to join us for a conversation on COVID-19, the economic stress it has put on countries around the world. Ira, 2020 is definitely something …

Ira: We are now in the midst of the worst global pandemic in 100 years and it’s obviously taken a toll on the global economy and will likely continue to do so for a while.

What governments have attempted to do in order to suppress the virus has been to suppress economic activity, in order to keep people apart and implement social distancing and thereby hopefully cause the virus to be suppressed and fade away. We saw that first in China with some success, where there was a sizable lockdown of the economy and the virus was suppressed. We’re now seeing a modest economic recovery there. Next came Europe, where there was a big outbreak, especially in Italy and Spain, very severe lockdowns on the part of government[s], a very severe drop in economic activity. But now we’re starting to see the easing of those restrictions and a modest rebound in economic activity. And finally, now within the United States, similarly, after a period of lockdown, we’re seeing an easing of restrictions in many locations. In some places, we’ve seen a suppression of the virus and other places we haven’t. But what we’ve learned from the experience so far is that lockdowns can be effective in suppressing the virus, but also that when the lockdowns are eased, we don’t get a sudden surge in economic activity. Instead, as long as people are aware that the virus is out there, both consumers and businesses appear to act cautiously, which slows the recovery. So I’ve been saying, we’re likely to have what you might call a U-shaped recovery as a consequence.

Tanya: Explain the U-shape. How is that going to play out?

Ira: A U-shape means that we start with a [sudden] drop in activity, which we did have and then it doesn’t bounce back suddenly. Instead it bottoms out and then it very gradually begins to revive. First, you have an easing of the lockdowns and you have consumers and businesses start to engage in some activities that were banned previously. But they’re cautious because they know the virus is still out there. So we don’t see people going quickly back to restaurants and movie theaters and airplanes. We also see that those businesses take precautions to enforce social distancing within their facilities and that limits their ability to supply goods and services. The end result is a very gradual recovery in activity, only likely picking up speed at the point where people and businesses are more confident that the virus is truly behind us. And that could come when there’s a vaccine or a treatment, or perhaps if we have in place substantial testing and tracing capabilities which enable us to suppress the virus in a more targeted manner without having to lock down the economy again.

Tanya: The experience with this has been so specific to location, to region. I’m based in Alabama and we were not one of the first Southern states to fully open up, but we’ve opened up. I mean, you can go to a movie theater. People are out eating in restaurants, dining in. And we’ve seen some numbers in Alabama that are a little bit troubling that people are watching right now.

Ira: This is true. The fact is that the federal government, the White House had provided some guidelines for states as to when it would be appropriate to reopen. Those guidelines involved how many days we’ve seen a decline in the number of infections and deaths, whether or not testing and tracing capabilities are in place. Most states have not met the guidelines that the White House provided,1 and yet most states have already begun to open up, some to a greater degree than others. The concern that has been expressed by some public health officials is that, if you reopen too early and people don’t abide by social distancing guidelines, there could be a second wave of the virus. There is precedent for this. If you look at what happened during the global pandemic 100 years ago, it came in three waves. The first wave came in the spring of 1918 and went away in the summer. Then it came back in the autumn to a much greater extent, involving many more infections and deaths.

There is a lot we don’t know about this virus. We don’t know if it’s seasonal, if it’s affected by temperature. We don’t know if people, once they get the virus, become immune to it. So we don't know if we’ll follow the same pattern that we did 100 years ago. But what we do know is that you’re right, there is already evidence that there’s a surge from a low base of infections in those places that do open too early.2 We also know that in those places where the opening comes later, that the infection is more likely to be suppressed and that the economic rebound is more likely to be robust.

The reason we know that is also from the experience of 100 years ago.3 There was a study done recently by the Federal Reserve Bank of New York where they looked at what happened in the United States in different cities in 1918 and 1919. Some cities reopened early and some didn’t. What they found statistically is that those cities that reopened early tended to have a sharper outbreak of the virus and a slower economic recovery and vice versa. There has been a point of view that there is a choice between suppressing the virus and having a robust economy. My view is that it’s a false choice. That if we get a rebound in the virus, we’ll probably get another downturn in the economy even without lockdowns. If people around themselves are seeing a sharp outbreak in the virus, they will engage in greater social distancing and that will suppress economic activity. Which is why it makes sense and many policymakers agree, that the first order of business is to suppress the virus and then worry about the economy. But in the meantime, use the tools of government to protect people and businesses. Indeed, that’s what the policy has been. If you look at what the Federal Reserve has done with its historic easing of monetary policy and what the federal government has done with its historic increases in spending, the goal has not been to stimulate the economy, [but] to protect people and businesses.

Tanya: You mentioned the Spanish flu of 1918–1919, which, of course, is a model that we can look back on. And there was also another outbreak, fairly significant, but not nearly as [big], in 1968–1969.

Ira: Yes.

Tanya: But we’re in a different environment now where we are so globally connected with supply chains, it’s such a connected environment. How do we take the lessons that we have from then and reframe them in this current economic space that we’re in?

Ira: There’s both a positive and a negative. The negative is that we are more globally connected, so it’s easier for the virus to spread very quickly. The negative is that we have benefited from global supply chains with just-in-time inventory management that’s provided good products at low prices to consumers around the world, but it does mean that supply chains can be very easily disrupted, as we’ve seen during this pandemic. So that’s the bad news.

The good news is that we now have technologies that enable us to function in ways that weren’t possible before. I can’t imagine what the world would have been like if this had happened 40 years ago, before we had laptops and cell phones and the internet. We in our firm and many of our clients have been able to continue working pretty effectively, in fact, because we have these technologies that would not have been the case before. So that’s clearly very different than in the past.

Tanya: Well and it may be reshaping the way that we look at employment and work moving forward. It may really accelerate some of the trends that we’ve seen happening around work from home and dispersed workplace and that sort of thing.

Ira: Certainly when it comes to people that work in offices, there will be an opportunity to continue working from home. Until this virus is suppressed and people are confident about that, we will see a continued dramatic shift to work from home, if only because who wants to get in a crowded elevator to go up to an office? In fact, one of our clients did a[n] analysis where they looked at what would it take to populate their office building in downtown Chicago if they limited the number of people in each elevator to two people. And they determined it would take two and a half hours to get people in and two and a half hours to get people out.

Tanya: Oh wow.

Ira: That doesn’t make sense. It makes sense for people to work from home. That means less traffic on the road, less demand for energy, probably lower energy prices, probably less demand for office space. That’s one consequence. Obviously, another consequence is probably more online shopping and probably a restructuring, a radical restructuring at least temporarily, of many consumer-facing businesses like restaurants and movie theaters and maybe fewer job opportunities for people that work in those industries and maybe more opportunities for people that work in an office.

That, unfortunately, might exacerbate the problem of income inequality. Because the people that have been disrupted by this are disproportionately people that earn low wages, have lower levels of education and skill. So this could exacerbate some of the social fissures. That would require more investment in human capital, so that more people would have the skills necessary to do the kinds of jobs that are likely to be created in this kind of environment.

Tanya: Certainly, looking back in history, as we were talking a little bit earlier, we can look to the 1918 flu pandemic and how we responded to that. We’re hearing a lot of conversation, particularly in the popular press, about the potential of something similar to on the scale of the Great Depression. I’m wondering where you stand on that?

Ira: Already we are now at a point where in the United States the unemployment rate is at a level we haven’t seen since the Great Depression and it will probably get worse before it gets better. One problem with the Great Depression is that it lasted a long time. That might not be the case in this instance. If we’re able to suppress the virus quickly, we might be able to recover more quickly than was the case back then. And obviously the policy response has been very different.

So the Great Depression is a useful analog, but another useful analog is World War II. In that instance, we had a formidable enemy that had to be defeated and we had a government that threw everything it had at that enemy. That’s what we’ve done in this instance. Eventually the enemy was defeated and we were able to get back to normal and the same will be true here. Many people have expressed concern about the level of debt that the government has taken on in this fight, but if you go back to World War II, the government took on a tremendous amount of debt for that battle. But in the end, it didn’t turn out to be that problematic because after the war, the economy grew at a good clip. There was a modest amount of inflation. The end result of that was that the debt-to-GDP ratio fell quite quickly and the debt became less onerous. And that would probably be true in this instance. So there are a number of interesting analogs and by the way, it was World War II that actually ended the Great Depression. So just another side.

Tanya: And right in between those two, the Depression and World War II, we had programmes like the Works Progress Administration, the WPA, which employed a lot of people in building the Tennessee Valley Authority, building highways, building bridges out where you are. Do you see that kind of thing happening?

Ira: We haven’t had a big investment in infrastructure. Instead, what we’ve done is protect people’s incomes. About 40 million Americans have filed for unemployment insurance in the past 10 weeks. Probably about 25 million of them remain unemployed and many more have dropped out of the labour force. So we have a horrendous amount of unemployment right now. And yet the government has provided huge financial transfers to people, including enhanced unemployment insurance, so that if you look at the data from April, personal income was actually way up, even though unemployment was way up. What was way down was consumer spending. People got this money from the government, which far more than offset the loss of income from lost jobs and yet people didn’t spend it. They saved it. So the personal savings rate in April went up from 13 percent in March to 33 percent in April.

Tanya: Wow.

Ira: People saved a third of their income.

Tanya: Which never happens.

Ira: Which never happens. The interesting thing about it is that from the perspective of each individual, it made sense in that people knew that this extra income was only temporary. People knew the virus is still out there. There’s a high degree of uncertainty. It made sense for them to be cautious. In many instances they couldn’t spend money. There were lockdowns. And even when lockdowns were eased, people were reluctant to go to a movie theater or a restaurant or get on an airplane. So they didn’t spend money that they might otherwise have done. From the perspective of each individual, it made sense. But from the perspective of a larger society, it meant a sharp drop in consumer spending and, therefore, a sharp drop in economic output and, therefore, the impetus for businesses to rehire people. It’s kind of a mixed situation which suggests that what’s really needed is that the virus be suppressed, because people aren’t likely to go out and spend that money in droves until they’re confident that the virus is gone. And then we could have a real surge in economic activity.

Tanya: Now, the virus isn’t the only thing that’s happening right now in the world. We have things like Hong Kong potentially losing special trade status. Can we talk about that a little bit?

Ira: That’s part of a larger tension between the United States and China. There are many aspects to it. There was a trade dispute between the United States and China in 2019. It seemed to be temporarily resolved by January when the two sides signed what I would call a truce, a temporary trade agreement that kind of put the tensions on hold, if you will. But now, with this coronavirus crisis, we’ve seen a very sharp drop in trade. We’ve seen the US administration accuse China of not being forthcoming about the origins of the virus. We’ve seen the United States suggest that if China doesn’t meet the trade goals of the truce, that we might end the trade agreement. Then there are conflicts concerning technology. There’s now, obviously, the conflict over Hong Kong. And there are other areas of conflict. These conflicts are real. They could have a negative impact on two-way trade, on two-way capital flows. And as a consequence, they could have a negative impact on technological innovation because the technology industry involves a very high degree of symbiosis between [the] US technology companies and their Chinese counterparts or their Chinese affiliates. If that symbiosis is broken, we could wind up with disruption of the process of technological innovation, which in turn could at least temporarily slow down global economic growth.

Tanya: So a very complicated situation we’re in right now. What other factors are you really watching? What are you looking at right now as you’re considering where the economy could be headed?

Ira: Obviously the virus is first and foremost. That’s issue one, two and three. But the real question is what’s being done about the virus and where is the virus likely to be a problem? We’ve seen the suppression of the virus work for the most part in China and Europe. We’ve seen some indications it could be suppressed in the US. It’s certainly been suppressed in New York, but not necessarily everywhere else. But what comes next and what worries me especially, is what’s going on in emerging markets. We’ve seen both an economic and a viral problem in emerging markets. In many emerging markets, we were already going through a lockdown that had a severe negative impact on economic activity in countries that didn’t have the resources we do here to support and protect people and businesses. So in many emerging countries, we’ve seen a rise in poverty and hunger. Then add to that the fact that in some countries they’ve begun to ease economic restrictions even before they’ve got the virus under control. As a consequence, we’re now seeing a revival and a surge in the virus in some parts of the world. That’s worrisome from many perspectives. It’s worrisome from the perspective of the economic health of those countries. And it does suggest the need for the rich world to provide help to those countries. It suggests also that if the economic situation becomes too catastrophic in some emerging countries, there could be an increase in outbound migration, which is one way that the virus could be brought back in another wave to Europe and North America. So the emerging market situation definitely worries me.

Tanya: I had a friend recently observed to me that we’re hearing about problems with the virus in South America, North America, Central America. We’re hearing Asia, we’re hearing Europe. What’s missing in this entire conversation is the continent of Africa, because we don’t seem to be hearing a lot of news about coronavirus and the impact of it economically, health-wise and otherwise out of Africa. Is that what you’re seeing as well?

Ira: Yeah, I would include Africa in what I was talking about. Obviously, South America [is] a big issue. Brazil is having a big outbreak. Russia is having a big outbreak. But Africa hasn’t had a big outbreak yet. They have had lockdowns in some countries which have already created economic catastrophes. Certainly, in South Africa there’s been a very sharp drop in economic activity, a big increase in unemployment and a big increase in poverty and hunger, based on what I’m hearing from our own people there. Africa could be a serious problem.

Now, on the positive side, Africa has relatively youthful demographics. The virus tends to spread most in places where there is high population density, big urban areas [and in Africa, those areas] tend to be very youthful. The older people tend, on average, to live in more rural areas. So that’s a positive in terms of avoiding a big outbreak of the virus.

On the other hand, the public health infrastructure is poor. People are not necessarily following the guidelines because they’re used to dealing with many other illnesses that are a big problem, such as HIV, for example, or tuberculosis. Clearly, if there were to be a big outbreak in Africa and there was migration to Europe, that would be a big issue. And certainly what’s happening now in South America could feed another outbreak here in the United States. So these are issues that are not only important from the perspective of a humanitarian problem in those countries, but the impact that could have in affluent countries as well.

Tanya: Ira, thank you so much for joining us. Hopefully we’ll have you back here soon to give us an update.

Ira: Absolutely. Very happy to do so.

Tanya: Ira Kalish is Deloitte’s chief global economist. You can find more of Ira’s take on the global economy online at

We’re on Twitter at @DeloitteInsight and I’m on Twitter at @tanyaott1.

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The Deloitte Global Economist Network is a diverse group of economists that produce relevant, interesting and thought-provoking content for external and internal audiences. The network's industry and economics expertise allow it to bring sophisticated analysis to complex, industry-based questions. Publications range from in-depth reports and thought leadership examining critical issues to executive briefs aimed at keeping Deloitte's top management and partners abreast of topical issues.

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  1. Paige Winfield Cunningham, “The Health 202: Most states lifting coronavirus lockdowns haven't met federal guidelines for reopening,” The Washington Post, May 13, 2020.

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  2. Ramsay Archibald and Anna Claire Vollers, “Alabama coronavirus cases surge to new high as state reopens,”, May 29, 2020.

    View in Article
  3. Sergio Correia, Stephan Luck and Emil Verner, “Pandemics Depress the Economy, Public Health Interventions Do Not: Evidence from the 1918 Flu,” SSRN, March 30, 2020.

    View in Article

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