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Coronavirus lockdown exit won't be easy without guiding hand of history

Neil Shearing


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Commuters crowd Cadorna train station in Milan

Commuters crowd Cadorna train station in Milan

AP

A woman in a hairdressers in Madrid

A woman in a hairdressers in Madrid

AP

Monitors show Japanese Prime Minister Shinzo Abe's press conference in Tokyo announcing an extension of the lockdown period

Monitors show Japanese Prime Minister Shinzo Abe's press conference in Tokyo announcing an extension of the lockdown period

AP

Commuters crowd Cadorna train station in Milan

Since the scale of the human, social and economic cost wrought by the coronavirus has become clear, politicians have compared the challenge of fighting it to that of a major war.

Admittedly, there are some similarities - not least the fact that, as in times of war, the entire machinery of government has now been geared towards tackling a single issue.

But the differences are greater. Wars are often periods of intense economic activity as production is ramped up to support the war effort. In contrast, governments have responded to the virus by shutting down production.

Wars are often periods of high inflation, as a combination of full employment and supply-side restrictions push up prices. So far at least, the coronavirus pandemic could perhaps be described as a period of "no-flation", since widespread shutdowns have meant that many of the goods and services that make up consumer price indices are simply not for sale at any price.

Finally, the economic legacy of pandemics is very different. In addition to the loss of human life, wars also destroy capital stock in the countries in which they are fought. One consequence is that post-war periods tend to be characterised by higher returns on capital and greater investment, part of it on reconstruction. In contrast, pandemics cause the same tragic loss of human life but without the destruction of capital.

In truth, while there are important lessons from some pandemics, particularly more recent ones such as SARS, most are likely to provide only limited insight into the economic consequences of the current coronavirus. The Spanish Flu of 1918 killed 100 million, mainly working age, people across the world. The death toll from Covid-19 has mercifully been much lower (currently 230,000 globally).

One of the reasons why the loss of life has been smaller this time is that governments have been able to lock down economies in a way that wasn't previously possible. This has implications for the real economy. In the near-term, the lockdowns have meant that the hit to output and activity has been both larger and more immediate than in previous pandemics. The uncomfortable truth, of course, is that the coronavirus - like both previous pandemics and wars - has imposed huge human and social costs, the scars from which will take years to heal.

But there's an important public policy point: if the long history of wars and pandemics provides limited lessons on the economic consequences, then there is little to steer governments as they navigate the path ahead. Without the guiding hand of history, the exit from lockdown is unlikely to be smooth.

Neil Shearing is group chief economist with Capital Economics (www.capitaleconomics.com)

Belfast Telegraph