Persistent COVID-19: Exploring potential economic implications

When the COVID-19 crisis spread in early 2020, many economists who stepped forward with projections of its impact assumed that a one-time shock would be followed eventually by a return close to the status quo. Views have differed since then regarding both the time it would take to produce vaccines and the extent of potential economic scarring, but, until the last few months, few outside the public health community seriously contemplated the possibility that the pandemic could persist on a significant scale.

The emergence of new variants of SARS-CoV-2, the virus that causes COVID-19, has made this assumption questionable. While not the most likely outcome, worse scenarios can no longer be excluded. (For various adverse scenarios along these lines, see, for example, figure 3 in Bosetti et al. 2021.) As our colleagues Chad P. Bown, Monica de Bolle, and Maurice Obstfeld explain in a recent post, the periodic emergence of new, potentially dangerous variants will remain a serious threat so long as parts of the world lack access to effective vaccines.

If COVID-19 persists and keeps threatening lives, two scenarios then seem possible. The first is recurrent waves of infection, leading governments to oscillate between imposing and lifting sanitary measures in response to the ups and downs of the disease. The second is a “zero COVID” scenario: sharp and sustained containment policies at the start, followed by milder sanitary measures combined with systematic tracing and testing to maintain a very low infection level thereafter. While the evidence suggests that this second scenario would lead to lower long-term human and economic costs, geographic, human, and political realities within and across countries make it less likely to happen, at least in the case of densely populated, open, tightly integrated economies such as those of Europe. For this reason, this blog focuses on the implications of the first scenario.

We see three main economic implications of a scenario of recurrent outbreaks. The first is lasting border restrictions, as countries try to protect themselves from infections elsewhere. The second is the likelihood of repeated confinements. The third is enduring effects on the composition of both supply and demand. We now explore each of these implications in turn. (A later blog will draw lessons for economic policy.)

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