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What old pandemics can tell us about the new ones
A study was completed for the US Federal Reserve Bank in 2007. It’s title: Economic effects of the 1918 influenza pandemic: Implications for a Modern-day pandemic – and not only did this report predict that the next pandemic was becoming increasingly imminent, it also shows us what to expect economically.
So what did the 1918 flu do to economies, and what does it mean for us right now?
Well in 1918/1919 around 40 million people worldwide died due to the Spanish flu. In the US the figure was around 675,000.
People in urban areas were harder hit by the flu, but they also had better access to health services.
During this crisis businesses also saw 50% - 100% drops in revenue, especially where full and partial quarantines were implemented.
The pandemic also caused inflation – the reason for this being that men between 18 and 40 were harder hit by the flu than other portions of the population. And this meant a smaller workforce at the time. Higher demand for labourers with a lower supply meant increased wages and higher inflation.
What is perhaps the most important piece of information this study found was that “Most of the evidence indicates that the economic effects of the 1918 influenza pandemic were short-term.” When we say short-term though – its for the duration of the pandemic and a couple of months following it.
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What can you expect will the pandemic’s effect be on South Africa’s economy
So let’s have a look first at what this pandemic will mean for us in SA going forward, then we’ll look at the international stage:
• Cities will be affected more than rural areas. That means rural areas will move out of lockdown faster than cities. But, with most manufacturing and economic activity taking place in cities this doesn’t really help rural economies much – but will relieve tensions of people living under lockdown in these areas
• There won’t be problems with regards to our labour force – all of the data so far suggests Covid-19 has a far greater effect on people 60 years and older. That means the labour force in this case will largely be unaffected.
• The lockdown hurts in the short term – but once its over things should get better soon. The lockdown will hurt businesses in the short run. People will lose their jobs, and even people that have not had any contact with the virus will be affected by it due to financial hardship. But this won’t last forever. Once the lockdown is lifted – things will get better.
• We will see price volatility because of changing supply and demand dynamics. I don’t expect inflation or deflation across the board. I expect we’ll see mixed responses. For instance – with restaurants closed, sales of meat like pork belly and fillet steak are down (meaning deflation for these types of food). But with more people at home, baking, making breakfast etc we’re seeing an increase in demand for eggs and flour (meaning inflation for these foods).
At the same time demand for oil has crashed – causing ‘deflation’ in the transport industry.
I also expect manufacturing to see short term inflation as demand could outstrip supply once sales are opened up but production still needs to ramp up.
• Certain industries will go bust – It’s clear that the airliners are in huge trouble. And air travel won’t open up on a sustainable scale soon enough to save them. I expect wholesale airline bankruptcies. Comair for instance already announced it will go into business rescue proceedings. Many hotel groups, restaurants and casinos will follow the same road.
• Other industries will boom – Pharmaceutical companies, food retailers and some food manufacturers will be on the positive side of the crisis – and these companies will be the safer investments to make and I’m buying on any weakness in their share prices.
The lockdown’s effects in SA could be reversed in six months to a year. But we would have to rapidly open up the economy from here.
It seems like that’s the general intent of government. But at the same time internal policy confusion regarding which underwear may be sold as essential goods and which not is taking the focus away from where it should be.
I can only hope that our president calls his ministers back to order…
That said – internationally we’ll see faster recoveries from Europe, China and the USA because these economies were healthier heading into their respective lockdowns.
They don’t have to compete with being moved to ‘junk’ status, or spiralling budget deficits unrelated to Covid-19.
So, businesses exporting, doing business outside of SA, are the local companies that will be better investments as we head into 2021.
There’s a lot of media noise. It might feel like there’s no light at the end of this tunnel. But humans are resilient. We’ve faced many such crises before – and emerged. Don’t despair, rather start your planning for the long run now.
Here’s to unleashing real value,
Editor, Red Hot Penny Shares
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