Pandemic leads to recession. This will be one of the leading motives in the economic circles and discussions in the coming weeks. Less than a month ago, the Dow Jones Index was above 29,000 points, and today – the day after Trump’s speech on restricting travel from Europe – went below 22,000 points. The last such “black” period for the index was during the Great Recession of 2008-2009. The fears of a new global recession are quite real, and among many observers, the feeling of uncertainty, unpredictability and force majeure prevails.

However, the economic impact of a global pandemic is not a completely unknown field in literature. Over the past two decades, there have been a number of studies that model a potential global pandemic and look in-depth at the development and impact of major epidemics in world history. In 2006, for example, the US Congressional Budget Office, in response to questions about the economic impact of the possible spread of avian influenza, produced an in-depth report assessing the macroeconomic impact of a potential influenza pandemic.

There are three pandemics in the 20th century – 1) the Spanish Flu from 1918-1919, which takes at least 50 million casualties or 2-3% of the world population, 2) the Asian flu from 1957-1958, which takes around 2 million victims and 3) the 1968 Hong Kong flu with about 1 million casualties. Undoubtedly, the Spanish flu is the worst case, with nearly 30% of the world’s population being infected. In the economic literature, the Spanish flu is used as an anchor for the potentially worst-case or critical scenario, and the 1957 and 1968 examples are more like an approximation to the softer pandemic scenario.

It is important to note that the pandemic is, in fact, a sharp shock to the economy, which is very different from the traditional manifestation of a financial crisis. The financial crisis can also explode abruptly, but it is usually the result of a variety of factors – accumulation of hidden risks and debts, pumping of balloons, bad investments, etc, while the pandemic is an entirely external factor that suddenly completely changes the economic relationships. Therefore, in a pandemic, there is a big difference between short-term and long-term effects, which are visible in absolutely all research on the subject.

In the short term, the impact on the economy is very deep – in the critical scenario, the impact is likely to be more severe than the usual financial crisis and closer to a post-war recession. The theoretically modeled and described effects in reports from 15 years ago are currently an evolving reality. As the pandemic progresses, international travel will shrink dramatically but is unlikely to stop altogether – in 2003, for example, the SARS virus epidemic resulted in a 2/3 decline (April versus March 2003) in the number of passengers landed in Hong Kong. Social contacts will be restricted, people will self-quarantine and avoid public places, which will result in retail trade – especially of non-essential goods – declining. Visits to restaurants, theaters, museums, gyms, etc. will shrink greatly.

An interesting observation from the economic literature on pandemics is that the authors have some underestimation of the draconian measures of governments. It is a fact that almost all studies suggest closing schools for a certain period of time, a huge decline in travel and a limited social life for people. But in terms of social life – visits to theaters, restaurants, etc., there is often talk of a change in people’s behavior and self-restraint. At the moment, however, we see that governments, including and the Bulgarian ones tend to outright ban such social contacts, that is, they act more rigorously than economists have suggested in theory.

This is actually a very important point. The number of deaths is a severe social drama and the cost of the pandemic, but the great economic effect is not in mortality but in morbidity. With the potentially high morbidity, as is currently the case with the coronavirus, all these short-term effects take effect – both because of self-restraint and because of severe restrictive measures by governments. The recession would be more a consequence of combating the morbidity and spread of the virus rather than the complications and mortality resulting from the disease itself – there are a great social cost and a burden on the health system.

The decline in economic activity in the short term comes from the direct impact on certain sectors – transport, retail, hotels and restaurants, lower labor supply and a large number of workers who will stay at home and thus not be productive, as well as the tension in the production and supply chains – in this case, the openness of the native industry also carries the risks of absorbing external shocks. To illustrate the possible effects, here are some of the assumptions for the severe and mild pandemic scenario.

In severe scenarios, we expect a temporary drop in demand in transport by 67% (17% in the softer scenario), in culture, restaurants, and hotels by 80% (20% in a softer one), in manufacturing and trade by 10% (3% in the softer one), with no serious effect in terms of demand for information technology and professional services, as well as growth in healthcare in both options. Added to this is the supply-side effect, that is, the decline in labor supply, due to morbidity and quarantining of workers. In the critical scenario, 30% of workers will be affected, absent from work for at least 3 weeks, while in the softer 20-25% of workers will be affected, but only a few days will be absent. However, even with lower morbidity, prolonged labor quarantine – as is currently the trend – works the same way.

The macroeconomic effect in the severe scenario is a drop of 4-5% of GDP in the year of the pandemic – relative to GDP without a pandemic, which would virtually guarantee a global recession. However, this is a critical scenario that does not imply a delay in morbidity – it is a reminder that this is already the case in China, although this does not guarantee that the full unknown about the future development of the virus remains. The softer option results in a GDP drop of about 1%, which most likely puts the euro area in recession but rather postpones a possible recession in our country in 2020.

Beyond the momentary shock, however, the long-term effect of a possible pandemic is rather minimal. Most reports even examine the extent to which growth could accelerate in the years after the pandemic, despite potential job losses. Even if we put aside the overly optimistic scenario, the overall expectation is that there is a minimal long-term effect, with one idea slowing down jobs due to structural factors. There is also a big difference with the recent financial crisis – the recession may not last long, but recovery has taken years. The single-shock of the pandemic should be more quickly covered and economic relations normalized.

All told so far has some peculiarities. One is that the bills focus on large markets and can be very different for a small and open economy. The main point, however, is that the global economy has entered a synchronized delay even before the coronavirus. If the one-off effect of a pandemic exacerbates the industrial slowdown and leads to a new financial crisis, the picture may be much different than the pure theory of pandemics and the long-term slowdown. The perfect storm would be a critical scenario pandemic – a severe blow and recession, followed by a financial crisis similar to the Great Recession – structural problems and a long recovery. The positive scenario is a softer variant of a pandemic, with disease control and a small blow to GDP – in this scenario the recession in Bulgaria will be postponed.