When looking at a chart of the S&P 500, you would think we were entering a depression or nearing the apocalypse. But what are the real impacts of a pandemic like covid-19? The stock market is an easy gauge to follow for sentiment, but how well can it measure the actual economic impact?
Using data from prior pandemics, I will quantify the estimated impact of the current covid-19 crisis. I will also provide a cost-benefit analysis of preventing future pandemic outbreaks by comparing investments in the necessary precautions and infrastructure to the expected economic fallout and ‘repair costs’ incurred by governments and central bank interventions.
While I’ve never lived through an epidemic of this size (I was not born quite in time for the Spanish flu of 1918), I witnessed firsthand the fundamental economic impacts throughout central and eastern Europe following the fall of the Iron Curtain. Working in an advisory role for Price Waterhouse, I’ve had to value many things that most thought were unquantifiable. Helping to stabilise and develop real estate businesses during and after the 2009 global financial crisis put me into a similar dilemma, especially when there was no reference point or actively traded market available.
What does recent pandemic history teach us?
Pandemic risk is a combination of low probability (est. 1-3% p.a.), infrequent occurrence, and – depending on prevention and containment measures – high to severe economic impact (up to $3trn). While pandemics have been observed in different forms and shapes throughout history, one common element is their constant underestimation combined with public complacency.