Economics
Opinion Article
March 18, 2021

Does more confinement mean more or less savings?

The Covid-19 pandemic that is plaguing the world may seem unique in the eyes of today's society, but the truth is that this is far from being an isolated event in history. On the contrary, in almost every century, similar phenomena are found, and there is no good news: pandemics will continue to happen and could become more recurrent, according to UNESCO.

In this sense, we must learn from the pandemics of the past and the current pandemic in order to be more prepared to deal with the emergence of what follows. Within Covid-19, countries responded to the health emergency in different ways. On the one hand, many of them decided to implement strong restrictive measures, seen as the only way to efficiently resolve the pandemic in their respective countries. On the other hand, some opted for milder measures, either because they feared a catastrophic impact on economic activity or because they preferred to try to end the pandemic through group immunity or even out of sheer carelessness in the face of one of the phenomena. Most striking of the 20th century.

Given the different approaches, the debate arises as to which of the two approaches has the most damaging effect on the economy. It has been assumed that strong restrictive measures destroy the economy, but is it still so? I invite the reader to consider the empirical evidence related to the 1918 flu pandemic brought by the article “Pandemics Depress the Economic, Public Health Interventions Do Not: Evidence from the 1918 Flu” (2020), in order to draw conclusions.

In this article, the authors compare the economic performance of different North American cities, which applied different containment measures, with the mortality rate, in the context of the 1918 flu pandemic.

According to this study, in the short term, there was no significant difference in economic activity between the locations that adopted more restrictive measures and those that did not. However, there is evidence that restrictive measures have had a positive effect on the economy in the medium term, which contradicts what is generally advocated.

The application of public health measures, such as the closure of trade, has direct and harmful effects on the economy by decreasing consumption. However, even if these measures were not taken, the intrinsic characteristics of a pandemic scenario, such as uncertainty and fear, would cause a reduction in investment by companies and consumption by families, so there would always be a contraction in economic activity. This may justify the fact that there are no significant differences between the two approaches in the short term.

However, the restrictions end up alleviating the original shock's impact - the pandemic itself - by decreasing the cumulative number of infections and deaths. Greater control over the epidemiological situation increases the feeling of security for families and companies, which ends up, ironically, saving the economy in the medium term.

Thus, the impact of this pandemic on future economic growth will always depend to a large extent on the efficiency of each government in its management. More radical containment strategies may harm the economy in the short term but have more desirable economic and social consequences in the medium and long term. If they choose the second strategy (less restrictions), it could be that the economy in the short term suffers less, but translates into uncertainty that has a negative impact in the medium term.

In short, and on a more positive note, according to Goldman Sachs, even in a scenario of restrictions almost as strong as those implemented in the first, economic growth will now be less penalized, arguing that “the sensitivity of economic activity to restrictions has decreased significantly since the first confinement ”.

Therefore, we must understand the profound changes that citizens and businesses have had to make in such a short period of time. The transition to digital business models, ways of working at a distance, as well as the conversion of workers from sectors in crisis to others in dizzying growth show the adaptability that the human species continues to have.

It remains for us now to create an economy more resilient to the crisis, more prepared for change, more agile in uncertainty, and sympathetic to those left behind.

This article was originally published in Portuguese here, Jornal Económico.

Stefano Grancini

Associate Consultant at Nova Economics Club

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